Goldman Sachs says US stocks now face ‘headwinds’ as bond yields rise and jobs growth slows

Goldman Sachs was quick off the mark in selling Archegos’ holdings
Ramin Talaie/Getty Images

US stocks now face headwinds as the economy returns to normal, Goldman Sachs said.
Its analysts said rising bond yields, inflation and slowing jobs growth would weigh on prices.
Yet they said stocks did not currently appear overvalued, due to the upbeat state of the economy.
Sign up here for our daily newsletter, 10 Things Before the Opening Bell.
Goldman Sachs has said that US stocks now face "headwinds" after a 12-month rally, with rising bond yields, higher inflation and slower jobs growth set to weigh on equity prices as markets move into 2022 and beyond.
The S&P 500, the benchmark US stock index, has rallied at breakneck pace since spring of last year when the economy shut down due to COVID-19. It has soared from a low of around 2,200 points in March 2020 to close to 4,200 points on Wednesday.
Despite stocks soaring to new all-time highs, Goldman Sachs analysts said in a note on Wednesday that prices are "roughly fair" given the state of the US economy. The analysts, Dominic Wilson and Vickie Chang, said low bond yields, relatively low inflation and an improving jobs market meant near-record-high stock prices appeared justified.
But they said that US stocks now face headwinds that will see the S&P 500 and other indices grow less quickly over the next three years, and said growing earnings would become increasingly important for stock valuations.
"We are forecasting that bond yields will rise steadily and the pace of improvement in the jobs market will ease as we move into 2022 and beyond," the analysts wrote.
"Although our macro forecasts still justify above-average valuations, they imply headwinds from current levels." They said the bottom line was that "valuations are likely to compress and more of the burden of future price gains is set to fall on growing earnings."
Wilson and Chang said the recent jump in inflation to 4.2% and April’s weak employment figures were near-term risks, although they recommended looking past the disappointing data.
"If the market is unwilling to view the recent rise in inflation as transitory or the recent slowing in jobs growth is more persistent than we expect, those valuation headwinds could come earlier and prove stronger," they said.
Goldman said a fruitful way to think about the future returns on equities is to think of stocks as kinds of bonds that give investors a yield, but never mature. Like with bonds, the more expensive stocks are, the lower the yield.
"The last time earnings yields were at or below their current levels in the late 1990s, the comparison with the macro backdrop was much less favorable," the analysts wrote.
Yet they added: "Since January… the sharp rise in bond yields has pushed our macro-consistent earnings yield off its lows, suggesting that the macro environment has become less supportive of higher valuations in recent months." The key 10-year US Treasury note yield, which moves inversely to the price, started the year at around 0.9% but has risen to 1.56% as growth and inflation expectations have risen.
Wilson and Chang said the headwinds to the macro environment are likely to continue. They predicted bond yields would continue to rise, although not dramatically; that there would be a bulge in core inflation that lasts well into 2021; and that the pace of the improvement in the labor market should slow after a rebound in the second and third quarters.
Read the original article on Business Insider

Source: https://www.businessinsider.com/us-stocks-equities-headwinds-bond-yields-inflation-employment-goldman-sachs-2021-5

Join the Discussion

  • BrokerEUR/USD
    FX Pro 0.91pips. (variable) margin: 3.33%
  • Back to top