"From ICU to KTV": Three Major Risks Blocking the Bull Market in U.S. Stocks in the Second Half of the Year
Goldman Sachs warns investors that the U.S. stock market bull run in the second half of the year faces three major risks: growth shocks, interest rate shocks, and a weak dollar. Although risk appetite indicators have risen to optimistic levels, a rapid recovery may have negative effects. Economic growth may decline due to tariff impacts, leading to an increased risk of stock market corrections. Analysts recommend adopting a neutral allocation and utilizing diversified investments and hedging strategies to address challenges
Goldman Sachs pointed out that investors need to be wary of the three bears behind the "golden-haired girl" in the second half of the year.
According to news from the Wind Trading Desk, a research report from Goldman Sachs on July 9 revealed that despite investors rapidly reallocating risk assets in the second quarter, and the market returning to a "golden-haired girl" scenario pricing, the U.S. stock market bull run faces three key "bear market" risks in the second half: growth shocks, interest rate shocks, and a weak dollar.
Goldman Sachs' Risk Appetite Indicator (RAI) shows that investors experienced an unusually rapid reallocation of risk after April 2. This indicator rebounded quickly from a low of -2 in April to the current 0.5, returning to a slightly optimistic level. This recovery is mainly attributed to the Federal Reserve's more dovish expectations, the resilience of the macro backdrop, and the support from Germany's fiscal policy and the U.S. "Inflation Reduction Act."
However, this rapid recovery itself carries risks. Historical data shows that such a significant rise in the risk appetite indicator usually indicates a negatively skewed distribution of stock market returns over the next six months, especially in a macro backdrop where tariff impacts, policy, and geopolitical risks may become apparent.
Goldman Sachs pointed out that the current risk premium has compressed to the low point at the beginning of the year, and the incentive to allocate risk assets upward in the short term is limited, while high valuations and potential weakening of macro data bring negative asymmetry to the stock market. Analysts recommend a tactically neutral allocation and suggest addressing the upcoming challenges through diversified investments and specific hedging strategies.
The First Major Risk: Growth Shock Leading to Stock Market Correction
The report indicates that economic growth may face significant downward pressure in the second half of the year, particularly due to the anticipated drag from tariffs.
The tail risk framework for the stock market shows that the probability of a significant market correction is currently higher than that of a substantial rise. This is primarily driven by three factors: high valuations, weak leading indicators, and a slight deterioration in business cycle scores.
Although hard data has not yet shown clear negative signals and financial conditions have eased, the direct impact of tariffs on the economy may become apparent in the second half of the year, posing a threat to corporate profitability.
Especially for the U.S. stock market, given the current high valuation levels, with indices like the S&P 500 nearing 25-year highs, the risk of a correction will significantly increase if growth expectations deteriorate.
For investors, this risk means a need to reassess stock allocations, particularly in multi-asset portfolios dominated by U.S. assets.
The report recommends diversifying through low-volatility stocks, defensive quality stocks, and safe-haven assets like gold to mitigate potential losses from growth shocks. Additionally, attention to non-U.S. stock markets may provide extra buffering opportunities, as they are more sensitive to optimistic expectations for global growth.
The Second Major Risk: Interest Rate Shock Impacting Long-Duration Bonds
The second potential risk comes from unexpected fluctuations in interest rates.
Goldman Sachs pointed out that if the slowdown caused by tariffs can be avoided, inflation may rise again, thereby exerting upward pressure on bond yields.
The report mentions that, thanks to the Federal Reserve's more dovish expectations, the next round of 25 basis point rate cuts is expected in September rather than December, leading to a moderate decline in U.S. long-term bond yields However, the expected fiscal policy in the United States and the upward pressure on yields in Europe and Japan may limit the downward space for interest rates. If there are concerns about fiscal policy or unexpected inflation increases, the Federal Reserve may be forced to adopt a more cautious easing policy, which will put pressure on long-term bonds, and the yield curve may continue to steepen under a more dovish pricing by the Federal Reserve.
This risk is particularly significant for fixed income assets and multi-asset portfolios, especially for holders of long-term bonds.
The report suggests that investors should lean towards short-duration bonds to reduce duration risk. At the same time, financial stocks (such as bank stocks) can serve as an effective tool to hedge against interest rate shocks due to their ability to benefit from a steepening yield curve. The recent decrease in the correlation of gold with the US dollar and real yields may also provide additional protection in certain scenarios.
Third Major Risk: Dollar Bear Market Drags Down Multi-Asset Portfolios
The final risk is that the continued weakening of the dollar may negatively impact multi-asset portfolios denominated in dollars.
The report predicts that the dollar will further depreciate over the next 12 months—targeting the euro to rise to 1.25 against the dollar and the dollar to fall to 135 against the yen, reflecting the stagflation effects triggered by tariffs and concerns about US fiscal policy and the independence of the Federal Reserve.
A weaker dollar is usually associated with increased risk appetite, but in the current environment, this weakness is more a signal of the weakening of the US exceptionalism narrative.
For non-US investors, the contribution of foreign exchange volatility to portfolio risk has significantly increased. Investors need to reduce dollar risk through foreign exchange hedging and allocating to emerging market assets and gold.
The report points out that emerging market stocks and local currency bonds perform better in a weaker dollar environment, especially considering the Federal Reserve may be more dovish and oil prices are expected to decline—Brent crude oil is projected to fall to $60 per barrel in the fourth quarter.
Additionally, European bank stocks and infrastructure indices, due to their lower correlation with the dollar, can also serve as effective diversification tools.
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Risk Warning and Disclaimer
The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at one's own risk