Goldman Sachs GS is reducing its valuation projection for the S&P 500 as rising interest rates signal bad times for stock prices.
Investors are reacting by shunning most asset classes and going into cash as a way to weather the storm.
‘A hard landing scenario is inevitable’: Goldman Sachs Chief U.S. Equity Strategist David J. Kostin posted a target valuation for the index at 3600 by the end of the year, maintaining that valuation in six months, and reaching 4000 within one year.
The index got closer to its 2022 lows this week, with fears of recession becoming more substantiated. The Dow Jones also marked its lowest level of the year on Friday, with other major indexes showing losses as well.
Goldman Sachs changed its projections for the market gauge, as interest rates are expected to continue to climb. Goldman had already dropped its year-end price target for the S&P 500 from 4700 to 4300 in May, when the federal funds rate was expected to peak at 3.25%.
Yet after the Fed raised the funds rate to a range of 3%-3.25% this week — with all signs pointing to further hikes in November and throughout next year – the firm adjusted its market forecasts in preparation for a peak of 4.5%-4.75%.
This has pushed Goldman Sachs economists to slash the price target for the S&P 500, as well as shift its investment recommendations to a “defensive” strategy. The firm is advising investors to own stocks with quality attributes such as “strong balance sheets, high returns on capital, and stable sales growth.”
“A majority of equity investors have adopted the view that a hard landing scenario is inevitable and their focus is on the timing, magnitude, and duration of a potential recession and investment strategies for that outlook,” reads the Kostin report.
With a historically-low unemployment rate, consumer incomes and spending are likely to increase in 2023, leading to strong growth which would continue to push inflation upward, which may lead to more Fed tightening.
“Most portfolio managers believe that in order to corral inflation the Fed will have to hike rates sufficiently high that it will result in a U.S. recession at some point during 2023,” the analysts said.
Investors flock away from assets and into cash: $30.3 billion flowed into cash this week as investors shun most other asset classes, according to EPFR Global data shared by Bank of America Corp. BAC in a new analyst note.
Pessimism is at its worst level since the 2008 global financial crisis, with bear sentiment at new highs, said the analysts. Cash, commodities and volatility are expected to outperform bonds and stocks, reported Bloomberg.
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