Goldman Sachs says the S&P 500 will likely end the year on a much higher note, believing that strong tailwinds are powering the market, even amid geopolitical and energy shocks.
In a new video update, Peter Oppenheimer of Goldman Sachs Research says that in the short term, the S&P 500 looks primed for a fresh leg down due to rising oil prices, a weakening labor market and tensions in the Middle East.
He also says the index is richly valued compared to other major indices.
“We think equities are at significant risk of a further correction. Despite sharp moves in oil and in software stocks, the S&P, for example, itself is only a few percentage points off its all-time highs. But there are real concerns about the path forward, at least in the near term. The spike in oil prices produces significant risks around economic growth and inflation. And labor market data are losing momentum, which could make the economy more fragile in the event of any further shocks.
But right now, US equities are near their highest valuations in the past 20 years and are well above the valuations we see in other equity markets around the world. So we would not be surprised to see a correction drag stocks further down.”
But Oppenheimer notes that a market pullback will offer long-term investors an opportunity to scoop up quality names at a lower valuation. He adds that the S&P 500 tends to rally in a big way within 12 months of a geopolitical event.
“However, the overall drivers of this bull market remain intact. The global economy and corporate earnings remain on a firm footing, and corporate and household balance sheets are still strong. It’s also important to remember that geopolitical and energy shocks have historically led to short-lived corrections that reverse quickly. If we follow the historical pattern, stocks will rally in the months ahead. So, while correction risks may be elevated in the short term, we do not expect to see a full-blown bear market.”
At time of publishing, the S&P 500 is trading at 6,591.
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