After slipping into correction territory earlier this year, the S & P 500 has enjoyed a rebound over the past month. Goldman Sachs Chief Global Equity Strategist Peter Oppenheimer explains why — and reveals what he thinks investors should do next. Stagflation and recession fears have grown in recent weeks amid a string of troubling macro factors. The Federal Reserve lifted its benchmark interest rate for the first time since 2018 and said more rate hikes are on the way as it seeks to tamper runaway inflation. Meanwhile, geopolitical tensions flared in Europe and energy prices are surging as a result. To compound market nervousness, U.S. five-year and 30-year Treasury yields inverted for the first time since 2006 on Monday, raising fears of an impending recession. U.S equities, however, have continued to do well despite the market volatility. The S & P 500 rose over 5% in March and now trades just 4% below its all-time high on Jan. 3, according to Goldman Sachs. In a note on March 31, Oppenheimer said the rebound in U.S equities is down to a few reasons. Firstly, real interest rates — which take into account inflation — have remained negative despite a rise nominal rates. As a result, investors are now likely to favor "real assets" to avoid capital losses and protect real returns, Oppenheimer opined. Equities, he added, are a real asset, with the dividend yield thought of as a real yield. "While equities may not have much upside in absolute terms, the risk balance has shifted, thereby raising their relative attractiveness in portfolio allocation towards real assets and equities," Oppenheimer said. Moreover, U.S stocks have also become cheaper as markets lag earnings growth, he observed. "While the U.S. remains expensive overall, the most expensive parts of it (unprofitable tech) have de-rated sharply as interest rate expectations have increased," he added. Meanwhile, private sector balance sheets remain strong, with high pandemic-led savings in households, while banks and corporates continue to enjoy strong balance sheets. Read more JPMorgan's Kolanovic cuts his S & P 500 forecast, but still expects a big comeback Several Wall Street strategists cut U.S. stock outlook with Ed Yardeni seeing S & P 500 drop to 4,000 Investor positioning How should investors position themselves against such a backdrop? Despite their performance this year, Oppenheimer sees little upside for U.S equities in the short-term. Goldman has forecast a year-end target of 4,700 for the S & P 500 — just 3.7% above its closing level of around 4,530 on March 31. This could be down to lingering market risks. "While equities should provide a hedge against inflation over the medium term, and should outperform bonds, there remain risks to the downside and more volatility, particularly related to growth risks," Oppenheimer said. Against this backdrop, he advised investors to look for companies that can "innovate, disrupt, enable and adapt," as well as stocks with "high and stable" margins. Oppenheimer also advised investors to diversify across assets, geographies and sectors to hedge downside risks. He favors "large allocations" to real assets, including real estate and commodities, as well as defensive stocks and high-dividend yield stocks.
Ukrainian servicemen walk through the village of Lukashi outside Kyiv, as Russia's invasion of Ukraine continues, Ukraine, March 27, 2022.
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