newsfilter.io

Bear Market Bounce or Stock Market Bottom?

Goldman SachsPeter Oppenheimer, Alison Nathan
Watch on YouTube →
  • Investors are cautioned against mistaking temporary bear market rallies for genuine bull market inflection points, as the latter typically emerge only after economic deterioration slows or the second derivative of growth improves.
  • A market recovery is expected to materialize only after policy rates and inflation expectations reach their respective peaks, with current optimism regarding such peaks viewed as premature.
  • The current downturn is classified as a cyclical bear market, with equity markets projected to fall approximately 30% from peak levels rather than the 60% typical of structural downturns or the rapid drops seen in event-driven events.
  • Valuations in global markets are considered to be at median levels, while US equities trade above their long-run average, indicating prices are not yet aligned with a full recession scenario.
  • Economic stress is anticipated to intensify further before recession indicators like PMI or ISM decline to levels historically signaling a recession, and interest rates are predicted to rise further before peaking.
  • Sentiment measures and investor positioning have not yet reached the depressed levels typically observed at a true market trough, suggesting recent upward moves are bear market rallies rather than turning points.
  • The initial phase of the next bull market, termed the "hope phase," is expected to last about one year, characterized by powerful, front-loaded returns driven by expanding valuations.
  • Future market cycles are predicted to be "fatter and flatter," generating lower aggregate returns with higher volatility due to the likely end of secular drivers like disinflation and globalization, and a shift toward regionalization.
  • Structural and secular shifts toward fiscalization, government involvement, and tighter supply in energy and labor are expected to reduce margin expansion and favor companies with sustainable balance sheets and stable margins.
  • The US economy is anticipated to have a higher probability of a softer landing compared to other regions, whereas Europe faces relative underperformance due to higher exposure to cyclical areas and China.
  • A stronger dollar is identified as a primary driver of relative underperformance in non-US markets when measured in common currency terms.
  • In a US recession scenario, the S&P 500 is estimated to trade at around 31.50 times earnings, with a decisive recovery expected to wait for attractive valuations alongside peaks in inflation and rates.
  • The firm notes that its fundamental bear market indicator and risk appetite index do not currently signal high probabilities for returns over the next three to six months.
  • Future market dynamics are expected to be driven more by idiosyncratic risk (alpha) than macro factors (beta), necessitating a portfolio barbell strategy that combines defensive, stable growth companies with deep value opportunities.
  • Investors are advised to diversify across geographies and industries while placing a higher premium on valuation, sustainable balance sheets, and compounding returns compared to the previous cycle.
  • The firm maintains an overweight position in resources and commodities, viewing these sectors as likely to be cash generative with potential for dividend growth in the emerging environment.