Another day, another sell-off in equities as US stock markets traded lower shortly after the opening bell, erasing Friday’s solid gains. At the time of writing, the SP500 index was 0.5% lower, hovering below the critical 4,000 USD region.
Goldman Sachs turns pessimistic
The decline in global equities on Monday prolonged a recent period of market turbulence. Stocks finished their sixth straight weekly decline last week, sending the SP500 16.1% below its January 3 peak. As the Federal Reserve seeks to reduce inflation, reaching its highest level in four decades, geopolitical instability in Ukraine continues, and China grapples with its biggest COVID epidemic since 2020, investors are weighing the chances of a broader economic slowdown.
In response to these worries, Wall Street analysts have become increasingly cautious about equities. For example, in a recent report, Goldman Sachs lowered its SP500 year-end price forecast to 4,300 USD from 4,700 USD. According to David Kostin, Goldman Sachs’ top US stock strategist, the reduced target reflects “higher interest rates and weaker economic growth than we previously projected.” In a recession, the SP500 will likely fall much further to 3,600 USD, according to Kostin.
Moreover, the financial market instability prompted by the Federal Reserve’s tightening of monetary policy has increased concerns about US growth this year, according to Goldman Sachs. As a result, the bank now expects annual growth of 2.4% this year and 1.6% in 2023, down from 2.6% and 2.2% previously.
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Morgan Stanley likewise
Additionally, in a letter emailed to clients over the weekend, Morgan Stanley’s chief equities analyst Michael Wilson repeated his pessimistic position.
Wilson, who accurately anticipated that US markets would decline in reaction to the Fed’s hawkish policies, now claims that stocks would fall much more. According to the strategist, investors are finally seeing that growth is slowing, and we can thank the Q1 earnings season for that.
“With valuations now more attractive, equity markets so oversold, and rates potentially stabilizing below 3%, stocks appear to have begun another material bear market rally. But, after that, we remain confident that lower prices are still ahead. In SP500 terms, we think that level is close to 3,400, where both valuation and technical support lie,” the strategist concluded.
Wilson believes that either valuations must fall to levels (SP500 multiples in the 14-15 area) or earnings projections must be reduced in order for selling to be overdone.