Goldman Sachs strategists moved to an overweight stance on U.S. and Asian equities for the next three months, citing earnings growth and lower valuations. They still flag higher rates and energy prices as the main near-term downside risk.
Goldman Sachs strategists advise putting more money into stocks for the next three months, citing upbeat earnings and a pullback in valuations. A team led by Christian Mueller-Glissmann is now overweight equities in the U.S. and Asia and keeps that stance for its 12-month view.
Their outlook for stocks was neutral in September, when they worried about volatility from choppy bond markets, looming midterms and geopolitical stress.
Valuations drop while the index goes sideways
The strategists say the S&P 500 gained roughly 0.8% from June to August, even amid upbeat earnings. Its forward 12-month price-to-earnings ratio stands at 19.1, versus 21.1 in early June and 22 times at the start of the year, according to FactSet.
Goldman says the biggest derating has been driven by strong tech earnings, notably hardware, though some parts of that sector have also gotten more expensive. Meanwhile, 10-year and 30-year Treasury yields are trading at more than two-decade highs, and the strategists say rising yields have particularly weighed on rate-sensitive parts of the stock market.
Earnings season and the risks ahead
The strategists expect the third-quarter earnings season, due to start this week, to "surprise to the upside" in the U.S. and Europe, according to the MarketWatch report. Wall Street analysts expect S&P 500 companies to post third-quarter earnings growth of 29.6%, according to FactSet.
However, Goldman still sees higher rates and energy prices as the main near-term downside risk to equities. U.S. midterm election uncertainty could also lead to a pickup in equity volatility from current low levels.
Bonds shift to overweight over 12 months
The team also moved to overweight on bonds for the next 12 months from neutral in September, though it stays neutral over the next three months. Markets currently expect more rate increases than Goldman strategists, who believe limited pressure from nonfood and energy prices will keep a lid on central bank tightening.
Their baseline assumes normalizing inflation, peaking energy prices and more dovish central banks. Near term, they prefer shorter duration bonds and remain overweight cash, such as short-term Treasury bills.
Source: MarketWatch
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