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Goldman Sachs strategist Christian Mueller-Glissmann shared her H2 outlook for equities after the S&P 500 lost over 20% in the first half of the year.
The strategist told clients that Goldman Sachs’ position remains “relatively defensive,” which is reflected in being Underweight credit, Neutral bonds and equities, and Overweight Cash and Commodities.
“Until the growth/inflation mix improves markets are likely to remain volatile as investors shift between inflation frustration and recession obsession. We look for opportunities to add risk for 12m; while the likelihood of a recession has increased, we wouldn’t expect it to be deep or prolonged,” Mueller-Glissmann said in a client note.
The strategist notes that she still hasn’t seen “full capitulation” across all indicators despite the fact that the positioning and sentiment indicators are very bearish.
Furthermore, Mueller-Glissmann sees an elevated near-term equity drawdown risk as “equities are pricing only a mild recession.” She reminded clients that “much of the valuation de-rating YTD has been due to higher rates/inflation.”
“Unless bond yields start to decline and buffer rising ERPs due to recession fears, equity valuations could decline further. In addition, earnings revisions are likely to turn negative in 2H.”
On when may be the right time to buy equities, Goldman Sachs strategist believes a peak in inflation could slow down tightening from central banks. However, equities would only rally in such a scenario if a recession was avoided.
