U.S. stocks quickly rebounded, Goldman Sachs: Limited short-term upside potential, but greater risk of pullback, all the issues from the beginning of the year are still present
Goldman Sachs warns that the short-term upside potential for U.S. stocks is limited, and the risk of a pullback is increasing. Despite positive signals in tariff negotiations and a recovery in market confidence, risks such as high tariffs, high market valuations, and slowing growth still exist. Goldman Sachs expects the Federal Reserve to delay interest rate cuts, and the obstacles faced by the market at the beginning of the year remain, requiring investors to pay attention to the risk of economic recession
After a rapid rebound in the U.S. stock market recently, major Wall Street banks have issued new warnings about the significant risk of a market pullback.
According to news from the Chase Trading Desk, Goldman Sachs stated in a research report released on May 15 that although tariff negotiations have sent positive signals and market confidence has somewhat recovered, this does not mean that risks have been eliminated.
The report pointed out that the effective tariff levels of the Trump administration remain significantly higher than before the announcement of the so-called "reciprocal tariffs" on April 2, and the U.S. stock market still faces risks such as high valuations, market concentration, and slowing growth.
In early April, the U.S. stock market experienced severe turbulence, with the S&P 500 index falling nearly 20% and the Nasdaq dropping 23%. Following the announcement of a trade agreement between the U.S. and the U.K., along with U.S.-China trade negotiations exceeding expectations, market confidence was restored, leading to a rebound in U.S. stocks.
Goldman Sachs believes this indicates that the bear market in early April was event-driven (by Trump’s tariffs) and primarily triggered by external shocks.
Are Current Risks Gone?
The report noted that while the tariff news is reassuring, high tariffs still exist, and growth will slow. In the U.S., the impact of tariffs is inflationary, and there remains a high degree of uncertainty.
Moreover, Goldman Sachs believes that the Federal Reserve may be less willing to cut interest rates, and they now expect the Fed to begin three rate cuts later than previously anticipated (in December instead of July). Therefore, Goldman Sachs pointed out in the report:
Although the stock market adjusted unusually quickly after the crash, consistent with the characteristics of an "event-driven" bear market, the typical trend of such bear markets usually remains stable for a period after the initial decline. If this typical pattern is followed, recent upside potential may be limited, and the market may face the risk of another pullback.
Obstacles Faced by the Market at the Beginning of the Year Still Exist
The report emphasized that many obstacles present at the beginning of the year have re-emerged, including high valuations, market concentration, and high risks (in trade and large AI investment returns).
Goldman Sachs believes that the pricing of cyclical stocks indicates that the market has calculated little downside risk to growth, so if hard data begins to deteriorate significantly from here, investors may again assign a higher probability to the possibility of an economic recession.
Additionally, the report noted that valuations in the U.S. stock market have also risen, with the U.S. market approaching historical peak price-to-earnings ratios again.
Diversification Strategy: Regional and Sector Allocation is Key
In the report, Goldman Sachs still recommends diversified investments and emphasizes that if the dollar continues to weaken, the rationale for diversification will be even stronger.
Goldman Sachs stated that although U.S. tech stocks have performed poorly this year, since interest rates began to rise in 2022, investment opportunities have shifted to a broader mix of sectors, regions, and styles. For example, European banks, which once faced numerous obstacles, have begun to recover.
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