(Bloomberg) - Equities are trading at lofty premiums, putting stocks at risk in the event that concerns over economic growth increase, according to Goldman Sachs Group Inc. strategists.
This looms as a threat for later in the year in particular, should the rally powered by enthusiasm over artificial intelligence run into worries about a downturn in the US, the team led by Christian Mueller-Glissmann wrote in a note.
“The macro backdrop might turn less friendly in the second half,” the strategists wrote. “Rising US recession risk would increase the likelihood of a deeper bear market, also considering elevated valuations.”
The S&P 500 Index hit several records last year, rising 16%. Still, it underperformed the MSCI World excluding the US, which climbed 29%, as investors sought to switch out of American assets in response to tariff turmoil and high valuations. The US benchmark trades at 22 times forward earnings, a 36% premium to global peers.
“Given high valuations and concentration in equity markets, we recommend increasing diversification across regions, across sectors, and across styles to enhance risk-adjusted returns,” the team said.
Stock markets have extended their rally at the start of this year, though global equities like Europe and emerging markets continue to outperform the US. The Goldman strategists said that as far the first half is concerned, better growth will continue to be the key driver of risk appetite. They remain overweight on equities for now.
“Having said that, with elevated valuations, risk-adjusted returns are likely to be lower and equity performance should broaden out beyond AI capex, both to beneficiaries of AI adoption and to economic growth beneficiaries more broadly,” they wrote.
By Rose Henderson
With assistance from Michael Msika
