Goldman Sachs told CNBC Friday the recent correction in stocks reveal that investors expect a bigger global slowdown than official data implies.
October was a disastrous month for long-only stock holders as equity markets around the world shed an estimated $5 trillion of market capitalisation. The S&P 500 in the United States fell on 16 of 23 trading days during the month.
Goldman's chief global equity strategist Peter Oppenheimer said that the volume of selling suggested forecasts of a distinct global slowdown.
"If we benchmark the way equities have moved against macro variables, we think they have now overshot the current slowdown and are implying a much further slowdown from here," Oppenheimer told CNBC's Street Signs, before adding that investors have "overshot on the downside."
Goldman illustrated the anomaly in a note last week that showed the MSCI World index slipping below its usual correlation to global manufacturing data.
The J.P.Morgan Global Manufacturing PMI— a composite index produced by J.P.Morgan and IHS Markit — fell to its lowest level in almost two years in October. It should be noted it remains in expansion territory at 52.1. Any figure above 50 indicates growth.
Goldman's separate "bear market indicator" — which takes into account the unemployment rate, manufacturing data, core inflation, the term structure of the yield curve and stock valuation based on the Shiller PE ratio — is at a rare 73 percent, its highest level since the late 1960s and early 1970s. Shiller PE ratio is based on average inflation-adjusted earnings from the previous 10 years.
Oppenheimer said while that's a red-light warning, underlying data in the model suggested that current inflation levels are more consistent with a correction rather than a bear market.
"We have low returns across all markets as we expect profit to slow and valuations no longer to rise. Most of our forecast are implied by single digit earnings growth," he said.