Goldman says stay defensive on stocks into next year, the bottom is not yet in

Published Mon, Nov 28 202210:01 AM EST

Investors should continue to position themselves defensively going into 2023 as the stock market hasn't yet hit its trough, according to a team of strategists at Goldman Sachs. "We remain relatively defensive for the 3 [month] horizon with further headwinds from rising real yields likely and lingering growth uncertainty," the team including Christian Mueller-Glissmann and Cecilia Mariotti said in a note to clients. The market has been roiled this year as the Federal Reserve deployed a series of aggressive interest rate hikes in an effort to bring down inflation running at the fastest pace since the early 1980s. Many fear the tightening could tip the economy, still recovering from the pandemic, into a recession. The S & P 500 has fallen 15.5% this year. The S & P 500 has rebounded 12% so far in the fourth quarter on hopes that inflation may be peaking and the central bank will slow its pace of rate hikes going forward. Despite the recent comeback, Goldman's strategists said conditions for an equity bottom have not yet been reached. "We are looking for lower valuations, a trough in negative growth momentum and a peak in interest rates before a new bull market starts," they said. "We expect markets to transition to a 'Hope' phase at some point in 2023 but from a lower level." The Wall Street firm set its year-end 2023 target at 4,000 on the S & P 500, just below its Friday's close of 4,026.12. Headed into the new year, the strategists recommend overweighting cash and credit, while underweighting bonds and equities. For stocks, Goldman advised clients to buy beneficiaries of slowing inflation and those companies with resilient margins, while avoiding unprofitable long-duration stocks. Goldman economists assigned a 35% probability of a recession in the U.S., but think any downturn would likely be mild. Despite recession risk remaining low, Goldman noted that concerns over financial stability have increased with indicators of market stress picking up across assets. "Housing markets, Italian sovereign risk, cryptos, private markets and shadow banking are likely to remain a concern," Goldman said.