Goldman Sachs lays out 10 reasons the bull market will keep charging after stocks' short-term slump
- The recent stock market slide will give way to a new economic cycle and corresponding bull market, Peter Oppenheimer, chief global equity strategist at Goldman Sachs, said in a Monday note.
- Equities are poised to fall further, particularly if the US economic recovery falters, Oppenheimer said.
- Yet a collection of trends and gauges points to the bull market strengthening over the next few years as investors shift into post-pandemic strategies, he added.
- Here are Oppenheimer's 10 reasons why the bull market can surge higher.
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Stocks are taking a breather after surging through the summer. Peter Oppenheimer, chief global equity strategist at Goldman Sachs, sees the pullback making room for an even stronger bull market.
Last week's tech-led market tumble continued on Tuesday as investors shifted more cash away from growth favorites and into safe havens. Thursday marked stocks' worst day since June and reminded market participants of the shaky foundations supporting indexes' surge to fresh records.
Stocks are certainly vulnerable to a steeper correction, especially if the US economic recovery "starts to lose momentum," Oppenheimer wrote in a Monday note. But investors expecting such near-term challenges to derail the bull market are wrongfully pessimistic, he added.
Here are the 10 reasons Oppenheimer sees the bull market having more room to run.
The 'Hope Phase'
Goldman views each stock-market cycle as having four phases: hope, growth, optimism, and despair. Unless another wave of COVID-19 infections slams the economy, the market probably entered a new cycle and sits squarely in a fresh "hope" phase, Oppenheimer said.
"We appear to be in the early stages of a new bull market," he added.
The introduction of a new cycle comes with some turbulence. "It would not be unusual" for the market to swing lower in the hope phase as overly optimistic investors bring their expectations in line with reality, Oppenheimer wrote. Yet the period is set to bring healthy returns and give way to a longer "growth" phase with more modest gains.
Clearer vaccine outlook
The US economic recovery now rests on sturdier foundations as potential coronavirus vaccines show positive trial results, Oppenheimer said. Goldman's economists expect at least one vaccine to be approved in the fall, with widespread distribution lifting economic activity in the first half of 2021.
Even if a vaccine arrives so soon, Oppenheimer expects fiscal and monetary support to stay in place and solidify the nation's rebound.
"Authorities would likely allow economies to run hot for a while to establish the economic recovery, likely pushing risk assets and equities higher," he wrote.
Rosier forecasts
Goldman's economists recently lifted their economic forecasts, and similar adjustments at other firms will likely follow, according to Oppenheimer. Most years bring negative updates, but the bank found post-recession years yielding upward revisions most of the time. A wave of fresh analyst optimism stands to boost equities.
Unlikely bear market
Apart from Goldman anticipating the formation of a new bull market, its own bear market indicator shows a 44% chance of another bear market emerging.
"While these high valuations ... could limit long-term returns for investors, it is more likely than not that this cycle is only in its early stages and has plenty of time to run," Oppenheimer wrote.
The gauge also signals double-digit returns for the next five years. Even if the market's surge out of March is taken into account, Goldman expects the market to maintain a steady rally through the near future.
Shrinking premiums
Equity risk premium — the excess gains enjoyed by investors who hold stocks over a risk-free asset — has the potential to improve as the new economic cycle kicks off, Oppenheimer said. A larger premium was justified earlier in the pandemic amid uncertainties around growth and deflation risks.
A new cycle, featuring stable growth, inflation, and interest rates, stands to last as long as the previous expansion and lift stocks accordingly, the strategist said.
"If this is the case, and strong policy support is reducing the risks of another recession any time soon, then the ERP may well decline," he added. Such a drop could draw in more participants as market risk meets investors' appetites.
A real-rate floor
The Federal Reserve has repeatedly strayed from entertaining the possibility of negative interest rates. But policymakers expect near-zero rates to last through 2022, and such forecasts pushed real rates into negative territory.
Such an environment "is highly supportive to risk assets in an economic recovery," Oppenheimer said, as it drives more capital into stocks and away from low-yielding strategies. Goldman doesn't expect a "liftoff" for interest rates until early 2025, leaving plenty of time for negative real rates to aid equity valuations.
Hedging for inflation
Bonds have surged in recent months on support from historically low interest rates, the Fed's asset purchases, and fading inflation fears. Yields now sit at extreme lows, erasing much of bonds' appeal for hedging against inflation.
Though inflation isn't likely to leap for years, stocks now offer "a much more effective hedge against unexpected price increases," Oppenheimer said. Nominal sales are loosely linked to inflation growth, he added, leaving room for the S&P 500 to swing higher as price growth accelerates.
Cheap by some gauges
Even after recent sessions' stock market declines, valuations sit at historically high levels. Yet stocks look somewhat cheap considering their dividend yields haven't fallen as much as corporate bond yields. This gap is possibly "unfairly wide" and could drive new stock gains if investors rush to the steady returns, Oppenheimer wrote.
"If dividend yields continue to fall as investors increasingly search for defensive and predictable yield, then these stocks could re-rate further, driving broader equity indices higher," he added.
Boosting the tech revolution
From online shopping to telehealth trends, the pandemic pushed "rapid adjustment in the composition of the stock market" and how companies are adapting to the stay-at-home landscape, Oppenheimer said. The shift justifies investors' piling into tech giants, and Goldman expects the sector to keep leading the market higher as digitization trends surge forward.
"We think this transformation of the economy and stock markets has further to go," the equities head wrote. "These companies could continue to drive valuations and returns in this bull market."
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