Goldman Sachs (NYSE:GS) has poured cold water on talk of an early equity market revival in 2023, suggesting the trough in equity markets has not yet been reached.
“We would expect lower valuations (consistent with recessionary outcomes), a trough in the momentum of growth deterioration, and a peak in interest rates before a sustained recovery begins,“ said the US bank.
For individual companies, investors should stick to those with quality, strong balance sheets and stable margin companies with deep value, energy and resources, where valuation risks are limited.
In contrast to the last cycle, more diversification across styles and regions, as well as a greater focus on valuation, should enhance returns over the course of 2023.
“We would characterise the current bear market as ‘cyclical’.
“Cyclical bear markets are those that are driven predominately by the economic cycle and by rising interest rates, driving fears of economic and profit recession.
“These types of bear markets typically experience falls of around 30%, last for 26 months and take 50 months to recover.”
Valuations in equities have fallen a long way since the beginning of this year but this doesn’t mean to say they are cheap, Goldman adds.
The problem is that the de-rating has come from an unusually high peak supported by record-low interest rates.
Rising interest rates should push valuations lower but the aggregate adjustment in equity prices remains relatively modest when we consider the shifts that we have seen in interest rates.
Looking at the US market (S&P500) Goldman added that after the recent move, the P/E is 17 times against a 20-year average of slightly under 16x.
“And the 20-year average bond yield has been 2.9%. We are at 3.8% today.”
Goldman added it expects markets to transition into a ‘Hope’ phase of the next bull market at some point in 2023 but from a lower level.