In the later days of the 2017 market rally, investors looked to what could potentially derail what seemed to be an unstoppable run. According to Goldman Sachs, the top concern among investors about the ageing bull market was the potential of more protectionist trade measures and higher interest rates.
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Now, both of these concerns have become reality, leading to the question: how much of a downturn can we expect? According to Goldman Sachs, not much at all.
Research notes from the bank acknowledged that the soon-to-be imposed steel and aluminum tariffs are a fundamental risk, but only for select companies. The bigger threat is retaliation from trading partners.
Potential retaliation would harm earnings and valuations, but the performance of agriculture, luxury goods and high foreign sales stocks reflect little investor concern.
The larger threat to corporate earnings and equity valuations is the potential for escalating trade conflict in response to these tariffs. Unfortunately, Goldman believes that retaliation is likely.
But, strong economic and earnings growth should continue to lift U.S. equity prices this year. Goldman’s analysts expect S&P 500 firms will post earnings per share growth of 17% in the first quarter. Goldman forecasts the S&P 500 will reach 2850 by year-end.
Inflationary pressures have been percolating higher in 2018, but according to Goldman, as long as Treasury yields rise at a monthly pace below 20 basis points and the yield remains below 4%, markets should be able to withstand the pressures. Goldman forecasts bond yields will reach 3.25% by the end of the year.
While Goldman analysts are positive on the S&P’s performance even with trade conflict and uncertain interest rates, they expect the markets will behave, this year, more like they have in recent weeks rather than in 2017.