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More downside risk amid earnings pressure




Stocks still face high risk of further downside, even after sliding into

bear market

territory, according to Goldman Sachs.

For now, stock prices are only subdued


as valuations fall amid rising rates and more hawkish politics

Federal Reserve

, analysts said in a Thursday note. But macroeconomic headwinds are likely to turn earnings revisions negative in the second half, they warned.

“Profit margins in markets are still high and some normalization would lead to negative earnings revisions, cyclically-adjusted valuations like the S&P 500 Shiller P/E remain relatively high, especially in a long-term context,” according to the report. note.

Although the S&P 500 has already fallen about 21% in the first six months of the year, marking its worst first half since 1970, Goldman estimated the index could hit 3,600 in a recessionary scenario.

For now, the bank’s economists see a 30% chance of a US recession next year and about a 50% chance over the next two years.

Yet even with the growing likelihood of a recession, analysts do not expect it to be deep or prolonged as the global economy “does not face major imbalances”.

But as the Fed raises rates to fight inflation, pushing yields higher, stocks will no longer benefit from the so-called TINA trade, when “there is no alternative” to get an efficiency.

Goldman noted that unless bond yields start to fall, stock prices could fall further as investors are no longer forced to choose between stocks and ultra-low-rate bonds.

“With inflation persisting and yields rising, investors face TARA (there is a reasonable alternative) and as central banks are busy battling inflation, they may find it difficult to cushion the

business cycle

“, said the analysts.




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