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Christian Mueller-Glissmann, a Senior European Equity Portfolio Strategist at Goldman Sachs, has downgraded equities to Underweight over the next 3 months. This move comes a few days after the firm’s U.S. strategists downgraded their S&P 500 year-end target to 3600, while the hard landing scenario calls for a drop to 3400.
Goldman’s strategist believes that equities will underperform in the last phase of a hiking cycle, which is defined as 3-6 months before the U.S. 2-year yield peaks.
“Real yields are still rising and tend to peak only when the Fed stops hiking, which is likely to take longer with high and sticky inflation,” Mueller-Glissmann told clients in a note.
Rising real yields are the biggest driver behind the bank’s urge for a more defensive tactical positioning. Mueller-Glissmann argues that the current levels of equity valuations “may not fully reflect related risks and might have to decline further to reach a market trough.”
“Since the GFC, TINA (There Is No Alternative) has been a key support for equities – with real yields declining materially, stocks were more attractive vs. fixed income, with relatively high equity risk premia (ERP). Investors are now facing TARA (There Are Reasonable Alternatives) with bonds appearing more attractive,” the strategist added.
Conversely, Goldman reaffirmed its Overweight rating on cash for both 3 and 12 months.
