Goldman Sachs gets bearish on stocks all around the world

by John Shmuel

Goldman Sachs became the latest investment bank to turn bearish on stocks Wednesday, downgrading global equities to neutral.

Analysts led by Christian Mueller-Glissmann said in a note to clients that investors should stick to being overweight cash in their portfolios for the next three months, while also considering overweighting credit (TLT) (LQD), where valuations look attractive.

“Until we see sustained earnings growth, equities do not look attractive, especially on a risk-adjusted basis,” wrote the analysts. “We expect particularly poor returns in dollar terms, with our forecast of a stronger dollar and the prospect of less negative equity/FX correlations.”

Goldman Sachs is the latest in a string of banks that have downgraded their outlooks on stocks in the past week. Bank of America Merrill Lynch warned about the potential for a worse-than-usual summer slump this year, while Citi equity strategist Tobias Levkovich said Friday that there were worrying signs in the market.

Goldman Sachs pointed to several factors that pose a threat to stocks at current price. It notes that the market is pricing in a very dovish outlook for U.S. rate hikes this year, even as comments this week from Fed policymakers suggests there could be as many as three rate hikes.

The investment bank also casts doubt on the current rally in emerging market assets. Any pullback could spook markets into the kind of selloff that was triggered last August, when big declines in China triggered a stampede out of stocks around the world.

“Until we see sustained signals of growth recovery, we do not feel comfortable taking equity risk, particularly as valuations are near peak levels,” the Goldman Sachs analysts wrote in their note.

Courtesy of financialpost.com