Goldman Sachs expects a "continued period of constrained equity market returns"

Goldman Sachs breaks down the conversations they are having with clients. 

Worries outweigh earnings

Investor concerns about Fed tightening, surging interest rates and the risk of recession has outweighed the strength in US first quarter earnings.

Goldman said that the corporate earnings exceeded expectations and prompted an upward revision to EPS estimates for the remainder of 2022 and for 2023, driven largely by the Energy sector.

Though, the boost to analyst estimates has not been enough to offset fears about downside risks to earnings if the economy falls into recession, and downside risks to valuations as the Fed tightening policy. 

Sluggish at best

The best case scenario for the economy and equity markets “probably involves a continued period of constrained equity market returns.”

“Risks around equity valuations are skewed to the downside even in our base-case, non-recessionary scenario.”

On the flip side, Goldman economists estimate a 35% likelihood of a US recession within the next 24 months. 

“Without more clarity on the path of Fed policy and economic growth, stocks will price an above-average recession probability and will be challenged to sustain prices much above the current level.”

Rotations reflect recession risk

Defensive sectors have strongly outperformed cyclical industries in 2022.

“The magnitude of cyclical underperformance appears consistent with a steeper economic slowdown than the recent pace of deceleration in metrics such as the ISM.”

ASX implications

The S&P/ASX 200 is much more defensive in nature relative to the tech-heavy US market.

Top S&P 500 sectors:

• Information technology: 28.1%

• Healthcare: 13.3%

• Consumer discretionary: 11.8%

Top ASX 200 sectors:

• Financial services: 27.2%

• Basic Materials: 23.3%

• Healthcare: 9.3%

The ASX 200 is down around -7.1% year-to-date compared to the S&P 500, which is down -16.6%.

ASX 200 vs. S&P 500 (orange) (Source: TradingView)