The stock market bear market is expected to intensify before giving way to more promising signals later in 2023, according to Goldman Sachs Research.
The MSCI All Country World Index of global stocks has fallen about 19% this year. Even though equities have risen somewhat since the summer, our strategists expect more volatility and declines during this bear market before bottoming out later in 2023. They expect interest rates to reach a peak and the deterioration in economic growth stabilizes before a sustained rally in equities. sets off.
The fundamentals driving the global stock market have changed dramatically, wrote Peter Oppenheimer, chief global equity strategist and head of macro research in Europe. In the team’s 2023 outlook, he pointed out that, unlike previous years, the cost of capital has risen significantly, hitting the valuations of fast-growing companies whose profits are expected to materialize in the future. Earnings for big tech companies fell short of analysts’ expectations.
Rising interest rates and commodity prices have made high-quality companies with reliable earnings and cash flow more attractive. “There has been a sort of reversal of relative fortunes between traditional incumbents and new digital entrants across many industries,” our strategists wrote. They favor companies with high dividends, strong balance sheets and high margins.
At the same time, investors may face a persistent bear market. According to Goldman Sachs Research, there are two main types: “cyclicals” driven by a slowing economy and rising interest rates, and “structurals” driven by a shock such as an asset bubble or a disaster. This downturn is cyclical, typically lasting 26 months and taking 50 months for stocks to recover. Stocks typically fall 30% and are rocked by short rallies before the market bottoms out in these cycles.
There are several key reasons why our strategists believe stocks could fall further. Although valuations have fallen this year, they have started from a very high peak in an environment of extremely low interest rates. Although many stock markets around the world are trading at low valuations, US stocks are not – US stock valuations are still at levels consistent with the peak of the tech bubble in the late 1990s.
Part of the difference in valuations is likely due to better expectations for US economic growth and a stock market with a different mix of companies. But even with that in mind, GS Research says it’s hard to justify why the US market is trading in line with its 20-year average. This is especially the case when the margins of big tech companies are under pressure, leading to job cuts and lower investment. And in the meantime, government and corporate bond yields have risen enough to become a competitive alternative to stocks.
Historically, the best time to buy stocks is when economic growth is weak but approaching stabilization. But while the outlook for expansion should improve later this year, that has yet to happen. “Timing is everything,” according to strategists at Goldman Sachs Research. “A weak economy that is still deteriorating is very different from an economy that is doing less badly.”
Goldman Sachs Research predicts recessions in Europe while the United States narrowly avoids a slowdown. But even if the world’s largest economy manages to continue growing, our equity strategists say there is a strong risk that investors price in a higher likelihood of a US recession before stocks hit the highest down. Their base case is that revenues are stable in 2023.
The peak in interest rates should be bullish for equities. However, our strategists believe bond yields can rise further, in part because US policymakers focus on maintaining tighter financial conditions to help contain inflation. It’s also unclear how long rates will stay high before central banks are ready to cut borrowing costs. Goldman Sachs economists do not expect a rate cut from the US Federal Reserve in 2023.
Investor positioning, meanwhile, indicates that the market has yet to bottom. By some metrics, investors have become more defensive and repositioned their portfolios to take on less risk, but flows into equity funds are still robust, particularly in the U.S. Our strategists expect to see more signs that investors capitulated to the bear market before stocks bottomed out.
The “hopeful” phase of the global stock market could begin later this year, according to Goldman Sachs Research. These recoveries usually start during recessions when valuations rise. Historically, it is better to invest in stocks just after the trough than just before: average 12-month returns are higher one month after the trough than one month before. “For this reason, we believe it is too early to position for a potential bull market transition,” Goldman Sachs strategists wrote.
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