The stock market is going nowhere as investors flock to risk-free assets offering higher yields

• The stock market is going nowhere as investors adjust to high equity valuations, according to Goldman Sachs.
• The bank said that a range bound stock market is likely with risk-free assets yielding upwards of 5%.
• Investors are flocking to money market funds, with the category seeing $117 billion in inflows this week.

Stock market investors hoping for a rally will have to be patient if Goldman Sachs' forecast proves correct.

The bank said that it expects the S&P 500 to trade in a sideways range that produces nothing but flat returns as investors grapple with unappealing valuations and juicy alternatives in the form of risk-free bonds and money market funds, according to a Friday note.

"We see two potential problems," Goldman Sachs' Peter Oppenheimer wrote. "The first is that the US equity market, long a significant outperformer, remains expensive relative to history and relative to real rates."

The second problem is the fact that investors can opt for a guaranteed, risk-free return of about 5% in the form of short-term treasury bills and money market funds. That means there is a high hurdle rate equities need to overcome to be attractive enough for investors to consider, and a US banking crisis certainly doesn't help.

So far, it's the risk-free cash assets that are winning, with fund flow data showing that money market funds attracted $117 billion in inflows over the past week, according to data from Bank of America. That represents the biggest week of inflows since 2020 when investors were flocking to safety amid the onset of the COVID-19 pandemic.

"Cash rates are hiker and, with zero risk and volatility, cash and short duration debt look very attractive relative to equities. This is particularly so given that the US 10-year bond yield is well above the dividend yield," Oppenheimer wrote.

The S&P 500 currently has a dividend yield of about 1.60%, less than half the US 10-Year Treasury yield of 3.45%.

And the risk-reward profile of the stock market isn't about to get better anytime soon, as Goldman expects flat earnings growth this year and just 5% earnings growth in 2024, meaning that valuations are likely to stay elevated unless a significant sell-off takes place.

"If, as we expect, global economies avoid recessions this year and inflation continues to moderate, the fundamental backdrop for equities would look more attractive for longer-term investors. But valuations are not yet compelling enough to offer a great risk/reward, particularly given expectations for modest profit growth in the near term," Oppenheimer concluded.