- The stock market's swift rebound through April drove Goldman Sachs' Risk Appetite Indicator to its biggest-ever increase, and the bank now warns "worsened" symmetry in the investing landscape will tear into returns.
- Stock prices "appear high considering the uncertainty over growth, policy, and inflation," the team wrote Friday, and investors should anticipate a near-term market stabilization.
- "Returns for risky assets will slow and volatility will remain elevated," the bank added, forecasting a return to a "fat and flat" trading range.
- Goldman remains overweight for stocks over the next 12 months but sees credit assets outperforming equities through the next quarter due to direct policy support and slashed dividends.
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After a "faster and stronger than expected" market recovery, Goldman Sachs expects stock returns to take a breather.
The combination of slowing COVID-19 infection rates and trillions of dollars in stimulus policy lifted equities through April. The S&P 500 and Dow Jones Industrial Average posted their best month since 1987, but the looming threat of lasting economic damage has investors wondering how much further the relief rally can run.
New optimism around a market rebound worsened asymmetry in global risk-taking, the team of analysts led by Christian Mueller-Glissmann said. The bank's Risk Appetite Indicator posted its biggest-ever increase from March to April, climbing to -1.1 from -4 as credit and stock markets soared.
Equity prices now "appear high considering the uncertainty over growth, policy, and inflation," the team said, and investors should expect a period of market stability before another rally or downturn.
"We think returns for risky assets will slow and volatility will remain elevated, and that we are likely to move back to a 'fat and flat' trading range," the analysts wrote in a Friday note.
The bank's positioning and investor sentiment indicators reveal participants are growing more bullish as prices recover, but remain generally bearish amid a bleak economic backdrop. The likelihood of a steep-yet-short recession makes investors' timing more difficult and could drive volatility higher as different time-horizons emerge. The current sentiment levels historically bring lower-than-average stock market returns and yield fewer winners in the market, Goldman added.
The bank still prefers equities for its 12-month thesis but views credit positions as the stronger investment through the next three months. The Federal Reserve's move into corporate debt provides a more direct backstop to bonds than stocks. The broad slashing of stock dividends improves bonds' relative yield, the firm added.
Commodities also pose an attractive opportunity for the next year, Goldman said. Oil markets are still rebalancing after crashing to negative prices in late-April, and a recovery in demand could bring a swift rally down the road. Energy stocks could enjoy some of the gains after sliding alongside the commodity market in recent weeks, the analysts said.
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