The S&P 500 has rebounded 10% from its March 14 low, but investors shouldn't expect much more of a gain soon, according to Goldman Sachs.
“To be clear, we see little upside now in the shorter term,” Goldman strategists led by Peter Oppenheimer wrote in a commentary.
Goldman sees the S&P 500 ending the year at 4,700, up just 2% from its recent level. It expects a gain of 6% in European stocks and 14% in Asian stocks over the next year.
Still, the recent rebound in stocks is “more rational than it might appear at first glance,” the strategists said. They point to seven factors buoying the market.
1. “Real interest rates remain deeply negative and equities provide a real yield.… This is pushing investors away from nominal assets as they try to protect real returns.
2. “Equities are a real asset as they make a claim on nominal GDP. ... So long as economies grow, revenues and dividends should also grow.
3. “Private sector balance sheets are strong. Pandemic-led savings have left household savings rates high. Notwithstanding the risks of a squeeze in real disposable income (given higher inflation), households are in a reasonably strong position…. Unemployment is at record lows in many countries.
4. “Credit markets have been relatively stable, reducing systemic risks…. Cash to asset ratios remain high. In addition, debt servicing capacity is as strong as it has been in 30 years. This is why we believe investors can expect dividends to be sustained, even in a weaker economic environment.
5. “Fiscal spending and capital expenditures are increasing. ...The Russian invasion of Ukraine has dramatically changed attitudes in Europe toward fiscal spending (the opposite of the post-financial-crisis era).
6. “Valuations have fallen to below long-run averages. While equities are only moderately below their highs, aggregate valuations have come down over the past year as markets have fallen behind the progression of earnings….
7. “Positioning had been heavily reduced, raising the asymmetry on risk assets…. Positioning had become very cautious in recent weeks.”