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Get ready for weak profits to drag down stocks says Goldman strategist

Cyclical & value equities hampered by QE: Pro

Equity investors hoping to keep riding the current upswell in the markets could be in for a shock, according to Peter Oppenheimer, chief global equities strategist at Goldman Sachs.

With the up nearly 7 percent year-to-date and hitting all-time highs, the Goldman strategist believed that investors might be getting complacent.

"We feel that it's not a goldilocks scenario," he told CNBC Wednesday.

"Markets will be stuck in a relatively flat return environment, with valuations peaking out but with quite a volatile range as you get sentiment swinging between fears of deflation on the one hand and optimism about reflation on the other."

The "Goldilocks" scenario is used by the investment community to describe an environment where asset prices, or the economy in general, are not too hot or cold. However, the description Oppenheimer has used all year is "fat and flat" and stuck by that analogy on Wednesday.

"I think that the goldilocks that's been building up over the last two months or so is really a belief that you're not going to get (Federal Reserve) rate rises really forever on the one hand. But on the other hand you've had this narrative that fiscal policy is suddenly going to be expanded rapidly everywhere and that's going to boost growth. And I think that combination I think is too optimistic and the rally that we've seen we think is reaching it's very mature stages," he added.

Grant Faint | Getty Images

Oppenheimer's comments added to a new research note at the start of the month that said that the "Goldilocks" combination was unlikely to last and investors will "eventually get caught by a bear."

He believes that either bond yields and interest rates will stay at record lows and economic and profit growth disappoints once again, or that growth and inflation surprise to the upside but bond yields adjust higher and cap equity valuations. Higher bond yields can mean that indebted companies need to spend more to finance that debt and this affects their valuations.

Oppenheimer has been slightly bearish for most of the summer on stocks, suggesting back in August that a 10 percent drop in the asset class could happen in the coming months.

Others analysts, including Credit Suisse are fairly bullish on stocks in the short term. At the start of August, the Swiss bank raised its year-end targets to 2,250 points and 3,100 points for the S&P 500 and Euro Stoxx 50 from 2,100 points and 2,950 points, respectively.

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