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David Kostin, Goldman Sachs chief U.S. Equity Strategist, believes the risk/reward for U.S. equities is skewed to the downside after a 17% rally in the S&P 500 since mid-June.
The strategist has reminded investors that the S&P 500 is trading near the bank’s year-end target of 4300. The key behind a 2-month rally in equities has been the “willingness of fund managers to embrace the view that the Fed will pivot and the US economy will achieve a soft landing,” Kostin wrote in a client note.
Moreover, Kostin sees the resemblance in the recent market performance and historical patterns around the actual end of Fed hiking cycles. However, there’s a catch.
“The 2000 experience illustrates the risk that the market could decline even after hiking stops if the US economy enters a recession. By contrast, if inflation surprises to the upside and requires the Fed to tighten more aggressively than our economists forecast, we would expect equity valuations to compress,” Kostin added.
All-in-all, the strategist sees limited upside from here “while downside risks loom.”
“While the US economy has not entered a recession yet in 2022, our economists estimate the probability of a downturn during the next 12 months at about one in three. In the event of a recession, we forecast the index could fall to 3150. In addition, the Fed’s focus on maintaining tight financial conditions requires that equities do not rise by too much,” Kostin concluded.
