Goldman Sachs: Underweight equities as real yields rise – Bloomberg

Goldman Sachs Group Inc. downgraded equities to underweight in its global allocation over the next three months while remaining overweight cash, saying rising real yields and the prospect of a recession suggest the rout has further to run, per Bloomberg.

Key quotes

The US investment bank’s market-implied recession probability has increased to above 40% following the recent bond sell-off, “which historically has indicated elevated equity drawdown risk,” strategists including Christian Mueller-Glissmann wrote in a note Monday. 

Current levels of equity valuations may not fully reflect related risks and might have to decline further to reach a market trough.

Real yields continue to be a major headwind.

Goldman’s bearish take on equity allocation comes after its US strategists slashed their year-end target for the S&P 500 Index to 3,600 from 4,300 last week.

Similarly, Europe strategists including Sharon Bell have reduced targets for European equity gauges, downgrading their 2023 earnings-per-share growth forecast for the Stoxx Europe 600 Index to -10% from zero. 

They have raised the recommendation for credit to neutral over the three-month horizon.

Investment grade credit yields are looking attractive in both absolute terms and relative to equities, they wrote. 

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