(Bloomberg) — Goldman Sachs Group Inc . and BlackRock Inc. are turning more bearish on stocks in the near term, warning that markets have yet to price in the risk of a global recession.
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With rising real yields as a major headwind, Goldman strategists cut the stock to underweight the U.S. investment bank’s global allocation over the next three months and remain overweight cash . BlackRock advises investors to “flee most stocks,” adding that it is tactically underweight developed market stocks and prefers short-term credit.
“Current equity valuation levels may not fully reflect related risks and may need to decline further to reach a market low,” Goldman strategists, including Christian Mueller-Glissmann, wrote in a note Monday. Goldman’s implied market recession probability has risen above 40% following the recent bond selloff, “which has historically indicated a high risk of capital withdrawal,” they wrote.
Morgan Stanley and JPMorgan Asset Management echo similar concerns after U.S. central banks in Europe showed their determination to fight inflation, sending global stocks into freefall in recent days. Some respite appears to be coming, although members of the MSCI world index have lost more than $8 trillion in value since their mid-September peak amid a rise in U.S. yields and the dollar .
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“We do not see a ‘soft landing'” where inflation returns to target quickly without crushing activity, BlackRock Investment Institute strategists Jean Boivin and Wei Li wrote in a note on Monday. “This means more volatility and pressure on risk assets.”
TINA to TARA
As stock market volatility continues to rise, JPMorgan Asset also maintains its underweight in equities heading into the fourth quarter. The firm “strongly” favors investment-grade credit over high-yield, global multi-asset strategist Sylvia Sheng wrote on Tuesday, anticipating sluggish growth in the US and a recession in Europe over the next 12 months.
A global recession probability model by Ned Davis Research recently rose above 98%, prompting a “severe” recession signal. The only other times it has been this high was during previous sharp downturns, such as 2020 and 2008-2009, according to the firm.
The days of the TINA – There is no alternative – mantra for stocks are over, Goldman strategists wrote. While falling yields had hardened the appeal of equities since the global financial crisis, “investors now face TARA (Reasonable Alternatives Available) with bonds looking more attractive,” they wrote.
“How much the yields, especially the real yields, have gone up at this point was very hard to see, that’s what makes us so uncomfortable,” Mueller-Glissmann said Tuesday in an interview with Bloomberg TV.
“Since we haven’t seen 150 bps in a long time, this changes the narrative from TINA to TARA,” he said. “You can go to credit to get your nominal return with relatively little risk, you can go to the TIPS market to get your real return with relatively little risk, so your incentive to own stocks is lower.”
Goldman’s bearish take comes after its US strategists cut their year-end target for the S&P 500 to 3,600 from 4,300 last week. Similarly, European strategists, including Sharon Bell, have cut targets for regional stock benchmarks, downgrading their 2023 earnings-per-share growth forecast for the Stoxx Europe 600 index to -10% from from zero
Both the S&P 500 and Stoxx Europe 600 ended Monday’s session at their lowest levels since December 2020.
“This bear market has yet to bottom out,” Bell and his colleagues wrote on European stocks in a separate note on Monday.
(Adds comments from the Bloomberg TV interview with Mueller-Glissmann from the ninth paragraph.)
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