The analysts of Goldman Sachs they believe Wall Street has not yet hit the lows of this bearish market cycle as equities still do not fully reflect the latest hike in real yields and the likelihood of a recession.
“Valuations of US equities still do not offer a historically high premium over the real yields offered by bonds and cash,” analysts including Kamakshya Trivedi explained in an October 25 statement. There can be “noticeable downturns if there is a full-blown recession or if geopolitical risks intensify in Ukraine or elsewhere, ”they said. None of the US assets monitored by Goldman are fully evaluating a recession, with equities carrying the lowest odds of a severely hawkish scenario, ”the US investment bank strategists write.
Their views differ from those of Citigroup and JPMorgan Chase colleagues who have argued that the collapse of the markets implies that there is a recession.
In the event of a severe economic downturn, the Goldman team said they expect that the S&P 500 index falls to 2,888 points, which implies a 25% drop from the close on Tuesday.
Goldman’s caution comes at a time when markets are making yet another attempt to find a foundation. The S&P 500 Index has risen 8% since October 12, when it closed at its lows since November 2020.
Traders have turned slightly bullish on Treasuries as they are hedging for lower yields, increasing long positions in portfolios and reducing bets on aggressive rate hikes by the Federal Reserve.
The chances of a recession are rising
A Bloomberg poll, conducted among leading Wall Street economists, indicates a 60 percent likelihood of a recession in the next year, up from 50% the previous month. Bloomberg economists including Eliza Winger are more bearish, setting the odds of recession at 100% over the next 12 months.
US Federal Reserve monetary tightening to contain inflation pushed advanced economies into contraction, with the S&P 500 down 19% this year. Meanwhile, 10-year Treasury yields rose more than 250 basis points over the same period.