Goldman Sachs’ Guide to Choppy Markets

Friday’s early stock-index futures appear optimistic, though the tide could turn pending the nonfarm payrolls report indicating robust labor market conditions leading to increased wage inflation.

Fueling this morning’s positivity is a 6% surge in Apple’s shares (AAPL) following their better-than-expected earnings announcement, optimistic outlook, and proposal for an additional $110 billion in share buybacks.

While Apple may not wield the same market influence it once did, its significant weightage of 5.8% in the S&P 500 index still bodes well for broader market sentiment.

Goldman Sachs’ Global Opportunity Asset Locator team, led by Christian Mueller-Glissmann, remains generally bullish on equities. They recognize the current macroeconomic landscape’s challenges, with stubborn inflation in the U.S. and resulting upward pressure on bond yields.

Nonetheless, they maintain a positive outlook for the year, citing the potential for equities to perform well in a late-cycle backdrop without recession.

Consequently, the Goldman team retains an overweight stance on stocks for both short- and long-term horizons, while being underweight on credit. They highlight factors such as elevated profit margins, robust balance sheets, and increased shareholder returns as driving forces behind the attractiveness of stocks.

Despite rising bond yields hindering equity valuation expansion, Goldman sees potential for corporate releveraging to support equities over credit. They advocate for diversification, suggesting exposure to defensive, quality, and growth stocks along with deep value investments.

Goldman Sachs

However, they caution that equity volatility may persist until inflation recedes and bond market fluctuations stabilize. With monetary policy support diminishing, they emphasize the need for growth to bolster risk appetite, but acknowledge that rising bond yields raise the bar for such growth.

To navigate these dynamics, Goldman recommends overweighting cash in the short term to mitigate portfolio risk amid tighter equity/bond correlations. In the event of a significant stock market correction, they anticipate a potential inflow of assets from money market funds into equities.

Additionally, Goldman suggests overweighting commodities to diversify against geopolitical risks and potential overheating in late-cycle environments. They see opportunities in oil futures due to recent price pullbacks and anticipate a rise in gold prices driven by central bank purchases and Chinese demand.

Goldman expresses particular bullishness on copper and aluminum, citing factors such as global manufacturing uptick, green transition initiatives, structural supply deficits, and low inventory levels as supportive of their positive outlook on these commodities.

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