Goldman Sachs is warning investors against buying into the market at current prices, given the threats from inflation and rising interest rates.
Goldman Sachs Chief U.S. Equity Strategist David Kostin wrote, “Despite the 18% year to date S&P 500 decline, equity valuations remain far from depressed. Valuations appear more attractive in the context of interest rates, but still do not look cheap.”
Kostin went on to say corporate earnings estimates look too high in light of what is coming, and company actions would seem to support that. He went on, “Valuations dominated investor focus in early 2022, but recent client conversations have centered on risks to EPS estimates. Company announcements have added to these concerns. Just weeks after shares fell by 25% on disappointing 1Q margins, Target cut margin guidance this week as it struggles to manage excess inventory. Investors have also focused on a string of downbeat comments from tech companies. In recent weeks firms including Amazon, Microsoft, and Nvidia have signaled intentions to slow hiring. This development is positive in terms of balancing the labor market but reflects management anxiety about growth and inflation.”
The June Michigan Consumer Sentiment reading dropped 14% from its position in May, reaching a low last seen in the middle of the 1980 recession. Consumers’ personal financial situations dropped about 20%. 46% of consumers attributed the negative changes to their financial situations to inflation. Meanwhile inflation rose by 8.6% year over year in May, the fastest surge since December of 1981.
Before the inflation report came out, it was expected the Fed would raise interest rates at their coming meeting this week by 0.5%. However in light of the inflation numbers coming out higher than all previous estimates, some are expecting the Fed to act more aggressively at the coming meeting. Others have just priced in a likelihood that the Fed will be raising rates for a longer, more sustained period. Both options however increase the risk of the Fed having to slow down the economy enough to trip a recession in order to control inflation, and some expect to see unemployment increasing in the next few quarters.
Kostin does have a soft spot for dividend-bearing stocks. He describes them as “particularly attractively valued. Dividend stocks typically outperform in environments of elevated inflation. In addition, dividends currently benefit from the buffer of strong corporate balance sheets.’
Among the stocks he highlighted as attractive in the note were those that have “above average” dividend yields such as Morgan Stanley, JP Morgan, Ford, UPS, IBM, Intel, Broadcom and HP.
