According to Goldman Sachs, bear market "remains unlikely" but there is still room for a deeper correction

The Wall Street corporation identifies multiple reasons that played a role in the decline that started in the midst of lofty expectations for Q2 profits and high valuations. In particular, investors have become complacent, viewing bad news as good, and counting on prospective rate reductions and the strong profits of big-cap artificial intelligence firms to make up for the overall slowdown in the economy.

After an extended period without a 5% decline, the correction occurred, with the Nasdaq rising by roughly half and global equities increasing by over a third from their October 2023 lows. But rather than looser financial conditions, greater values have powered the majority of this advance, suggesting a rising sense of complacency in the market.

The current market meltdown has been set off by a number of linked variables. There has been mounting evidence of slower growth momentum, especially in China and Europe. Fears that central banks, including the Fed, have been sluggish to lower interest rates were heightened by the US jobs data for July, which revealed an increase in the unemployment rate to 4.3%. As a result of this change in attitude, defensive equities have outperformed cyclical stocks.

The market turbulence has also been worsened by a large unwind of carry trades, which has been made worse by a 10% increase in the value of the yen relative to the dollar and a fall in Japanese stocks.

Another factor has been high expectations for the second-quarter earnings season, especially for large-cap US technology firms. Even while overall performance has not been poor, top tech stocks' inability to generate sufficient returns on their AI investments has resulted in severe penalties for any disappointments.

Even after the correction, prices are still high, especially in the US. The MSCI AC World's 12-month forward PE has only slightly consolidated, while the S&P 500's PE ratio is currently above 20x. According to Goldman Sachs strategists, the S&P 500's PE might drop to about 18x in a recessionary situation, with a fair value of 4800.

The six core components that make up Goldman Sachs' Bull/Bear indicator are still elevated, suggesting that there is a greater likelihood of a bear market.

Traders think that the correction still has further to go in the near term.

But given that most bear markets are the consequence of recessionary concerns, they think that a bear market "remains unlikely."

(Sources: investing.com, reuters.com)