Source: Jin10 Data
The macro and policy uncertainties have brought further warning signals of volatility to the stock market in recent weeks, but Goldman Sachs analysts said that the risk of US stocks falling into bear markets, which means larger-scale adjustments, seems small.
According to the bank, the risk of investor withdrawals is high in the case of overvaluation, mixed macro prospects, and policy uncertainties.
Although these factors may cause volatility and erode returns in the coming months, Goldman Sachs pointed out that there is not much reason to believe that US stocks will fall 20% from recent highs.
"We believe that by the end of the year, the risk-adjusted return of stocks may be relatively low. However, we believe that the risk of a bear market is still low, and the risk of an economic recession is relatively low, thanks to a healthy private sector and the Federal Reserve's accommodative policy," analysts wrote in a report on Tuesday.
They pointed out that the risk of a 20% drawdown has risen to about 20%, which is still relatively low. Analysts said that historically, a risk exceeding 30% would be a "clear warning signal."
"We have a slight risk preference for the next 12 months," analysts said.
They also pointed out that bear markets characterized by drawdowns of more than 20% from recent highs have become less common since the 1990s, as economic cycles lengthen, macro volatility decreases, and the Federal Reserve's policy has a greater "buffering" effect.
The company's outlook was made during a period of significant volatility in the US stock market due to weaker-than-expected macroeconomic data in recent months. After the release of the July non-farm payroll report, there was a significant sell-off in the US stock market in early August. Last week, the S&P 500 index recorded its worst week in over a year, as the slightly lower-than-expected August employment report raised new growth concerns.
Regarding the extent of the Federal Reserve's interest rate cut, Goldman Sachs chief economist Hazus said on Monday, "I wouldn't rule out the possibility of a 50 basis point rate cut, but a 25 basis point rate cut is more likely." Hazus added, "I think the Federal Reserve has sufficient reason to cut interest rates by 50 basis points because the current federal funds rate is excessively high. It is the highest policy rate among the G10 countries. Despite the fact that in reality, the United States has actually made greater progress in terms of inflation than most G10 economies."
However, Hazus and his colleagues believe that using such a "big gun" could potentially harm market sentiment.
Bank of America economist Aditya Bhave said in a client report, "We believe that based on the data at hand, such aggressive rate cuts are not necessary. Moreover, if the Federal Reserve starts with a 50 basis point cut, whether through Fed officials' speeches or dot plots, even the more dovish forward guidance with smaller magnitude could lose credibility."
Investors widely expect the Federal Reserve to begin cutting interest rates at next week's policy meeting. According to the CME Group's "FedWatch" tool, most people expect the Federal Reserve to cut rates by 25 basis points, with market expectations of a 100 basis point cut by the end of this year.