After numerous warnings from Goldman strategist David Kostin that stocks are expensive, most recently over the weekend when he wrote that”Goldman strategist on their expectation of upside to 2017 EPS forecasts as they face the reality that the accretive impact from tax reform will not occur until 2018″ and that “revisions to consensus EPS forecasts during the past few months have been negative for both 2017 and 2018” Goldman officially downgraded equities.
Warning that as a result of rising drawdown risk, a function of the “interplay of the cycle and rates”, with “growth momentum nearing its peak and rates increasing further with a hawkish Fed, the asymmetry for equities is turning increasingly negative.”
This also means more vulnerability to potential shocks, e.g., from European politics, US policy, commodities and China. The increase in risk appetite in recent months and strong positioning by systematic investors such as CTAs and risk parity funds increases ‘vol of vol’ risk, i.e., the potential for a sharp correction.
As a result, “given the asymmetry for equities is getting worse, we downgrade equities to Neutral for 3m. Nonetheless, after what Goldman believes will be an initial flush, stocks will rebound again, and as a result “we remain Overweight for 12m and still see c.5% total return, which is high compared to other assets.”
Here are the highlights from the just released report:
Equity drawdown risk – is the trend still your friend?
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