No bear market for stocks in sight even as macro and policy uncertainty threaten further volatility, Goldman Sachs says

• Higher valuations, a mixed macro outlook, and policy uncertainty raise the risk of further declines for stocks.
• Yet, odds of a bear market are low amid a strong private sector and coming rate cuts, Goldman Sachs says.

Macro and policy uncertainty have raised warning signs for further volatility for stocks in recent weeks, but the risk of a steeper correction into bear market territory looks remote, Goldman Sachs analysts said.

According to the bank, there's an elevated risk that investors pullback amid lofty valuations, a mixed macro outlook, and policy uncertainty.

While those factors may spark volatility and eat into returns in the coming months, there isn't much reason to believe a 20% drop from recent highs is in the cards.

"We believe risk-adjusted returns for equities are likely to be lower into year-end. However, we think the risk of a bear market remains low with relatively low recession risk, helped by a healthy private sector and central bank easing," the analysts said in a Tuesday note.

They note that drawdown risks have risen to around 20%, which is still relatively low. History shows a risk above 30% would be a "clear warning signal," according to the analysts.

"We are mildly pro-risk" going into the next 12 months, the analysts said.

They also noted that bear markets, characterized by drawdowns of over 20% from recent highs, have become increasingly less common since the 1990s, with longer business cycles and lower macro volatility, plus greater policy "buffering" from central banks.

The firm's outlook comes as indexes have been rattled in recent months by volatility stemming from weaker-than-expected macro data. A steep sell-off in early August after the July jobs report was followed this month by the S&P 500's worst week in over a year as a slight miss in the August employment report sparked fresh growth fears.

Investors widely expect interest rate cuts to begin at next week's Fed policy meeting. Most expect the central bank to deliver a 25 basis point cut, according to CME's FedWatch tool, with markets eyeing 100 basis points of cuts by the end of the year.