Stocks have soared since bottoming in October but be careful – it’s probably just another bear market rally. So says Goldman Sachs in its 2023 global equity outlook, which warns of “more volatility and declines” in a “lingering” bear market that will likely end at some stage next year.
It sees stocks as vulnerable for three main reasons. Historically, equities tend to recover close to the peak in interest rates and inflation, says Goldman, but they often weaken into the final rate rises as growth expectations deteriorate.
Secondly, valuations look challenging given the difficult economic climate. An index that combines price/earnings ratios, dividend yields and price/book ratios indicates global equity valuations have fallen to about the 50th percentile relative to history. That’s okay, but readings below the 30th percentile would be safer and more consistent with conditions ordinarily seen near market bottoms. Many stock markets do look cheap, but the problem is the most important one – the US – doesn’t. Instead, it’s trading in line with its 20-year average.
Thirdly, investor positioning doesn’t suggest stocks have troughed. Equity fund inflows are “still robust”, particularly in the US, with Goldman looking for more signs of investor capitulation before stocks bottom.
Overall, Goldman reckons cash-rich investors should hold off for now. Historically, average one-year returns are “very much higher if you wait until one month after the trough than if you invest one month before”, it says. Goldman isn’t alone in its assessment, with Morgan Stanley, UBS and Credit Suisse all issuing cautious 2023 outlooks.
Of course, forecasting is a tricky business. A year ago, few strategists were forecasting a prolonged bear market, and investors will be hoping strategists are similarly off track in 2023.
