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Investment Ideas 2022: Explore three key themes dominating markets where investors might uncover potential opportunities. Read More

   
MARKET PULSE 
|
August 2022

MARKET PULSE | August 2022

Macro Views


Global Growth

We expect energy supply to be a key feature of economic uncertainty in Europe, significantly pressuring the region’s growth-inflation mix. In our view, the energy crisis may contribute to aggregate demand destruction, materially increasing the odds of a Euro area recession and weighing on US growth through trade spillovers. Consequently, we revised our 2022 US and Euro area growth to 1.6% and 2.9%, respectively. Read More

Inflation

We believe Euro area headline inflation will peak at 10.3% YoY in September on four key drivers: 1) elevated energy prices, 2) continued food price pressure, 3) prolonged euro weakness, and 4) re-intensified supply chain bottlenecks. US inflation is also likely to remain elevated on strong wage growth and firm shelter inflation, though early signs of relief are apparent—inflation expectations have softened, gas prices have eased, and core inflation has trended lower. Read More

Monetary Policy

The ECB has joined the Fed in resorting to data-dependent guidance. However, the hurdle to seeing a steeper ECB hiking path remains high given a deteriorating growth outlook and weak euro. We expect a terminal rate of 1.50% by 1Q 2023. While the ECB’s anti-fragmentation tool may be powerful, uncertain activation conditions may still necessitate a fiscal solution to contain fundamental sovereign risk. Read More

US Consumer

Consumer wallet shares have shifted from discretionary to essential spending. Though saving buffers exist, financial cushions remain uneven. We expect 2022 cash flows to fall  -3% in aggregate and  -25% for low earners who rely on fiscal stimulus. Still, high absolute wealth and strong debt service capacity should keep households resilient. Read More

Market Views


Earnings

Preliminary 2Q S&P 500 earnings growth has printed near expectations, with a strong US dollar weighing on revenues. We estimate that a 10% appreciation of the trade-weighted US dollar reduces index-level earnings by 2-3%. Additional focus resides on companies indicating hiring freezes or slowdowns, which we expect may moderate a hot labor market and cool wage pressures. Overall, we favor profitability over revenue in a world of higher inflation and rates. Read More

Credit

We believe recent credit spread widening may already reflect slowing macro activity. In the US, ratings migration remains net positive, albeit with slowing momentum. While the fundamental picture is likely slightly weaker in Europe, we think carry may be appealing as overall yields are higher. Still, the withdrawal of ECB support keeps us cautious. Read More

Commodities

The recent selloff across commodity markets reflects heightened recession risk and US dollar strength, despite continued supply fears. Considering our below-consensus expectation for Chinese growth, we think copper demand may soften, moderating our near-term outlook. We revised our 12m forecast from $12,000/ton to $9,000/ton. Read More

FX

The US dollar has continued to appreciate, reaching parity against the euro last month. As US monetary policy tightening continues and risk-off sentiment deepens, we believe it can find additional strength near-term. More specifically, the greenback may perform well especially relative to the Chinese renminbi in the next year as renewed COVID-19 cases soften near-term Chinese economic growth. Read More

Bear Bottom or Bounce


The US equity market has traded at levels suggesting significant macro weakness. While the path remains broad, two historical episodes where the S&P 500 contracted  -20% in the first half of the year were followed by median forward returns of +33% in the year ahead. At today’s price, we believe risks ahead are becoming more balanced with market confidence likely to be restored once 1) inflation is past peak and 2) Fed policy trajectory shifts. While de-risking may make sense for select investors, those with time horizon and sufficient risk appetite may benefit from staying the course, especially after already realizing bear market losses.

Market Pulse August 2022

BUYING BEARS HAVE HISTORICALLY DELIVERED FAVORABLE RETURNS

The math has also become more favorable for investors, in our view. In past periods where equity markets have priced in a  -20% pullback, buying into a bear market has generated +24% return over the next 12 months, with a positive hit rate of 75%. Similarly, equities have gained on median +33% in the 12-month ahead even after being down  -20% in the 1H of the year. As the fundamental picture remains intact, we believe tough starts do not always mean bad finishes.

Source: Goldman Sachs Asset Management.
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