Equity markets should be more attractive than cash for the first time in a couple of years on a risk adjusted basis, according to Goldman Sachs.
Equity markets tend to perform better as interest rates fall but only if a recession is avoided.
According to Goldman Sachs’ Global Equity Views report, published Tuesday, equities have entered the “Optimism” phase of the cycle, which is a stronger phase, driven by growing earnings and rising valuations.
“The cycle has been progressing reasonably close to the typical pattern,” Goldman Sachs analysts wrote. “The ‘Hope’ phase was very consistent with the average in length and strength, while the ‘Growth’ phase has been weaker, dragged down by sharp rises in interest rates.”
The recent rally, however, has resulted in much of this being priced into markets already, the report said.
Equity markets are likely to climb out of their flat range, but “the speed and scale of the rally from here is likely to be tempered,” according to analysts, and while there are upside risks to equities’ profit growth, it will likely be modest as a lower inflation would affect nominal GDP and revenues while margins remain flat.
U.S. price-to-earnings ratios are getting closer to their highest levels in 20 years, leaving little room for valuation expansion.
Also, cross asset volatility in equities is very low, which suggests that there is still potential risk that is not priced in.
“While valuations of equities remain relatively high already, particularly in the U.S., strong balance sheets and cash distribution make the return likely, even with no growth, more attractive relative to cash,” analysts wrote.
Equity markets should be more attractive than cash for the first time in a couple of years on a risk adjusted basis.
Goldman analysts expect a better period for bonds and equities “despite ongoing encouraging news on the economic front with above-consensus retail sales growth and lower-than-expected jobless claims.”