- The stock market is going nowhere as investors adjust to high equity valuations, according to Goldman Sachs.
- The bank said that a range bound stock market is likely with risk-free assets yielding upwards of 5%.
- Investors are flocking to money market funds, with the category seeing $117 billion in inflows this week.
Stock market investors hoping for a rally will have to be patient if $4 forecast proves correct.
The bank said that it expects the $4 to trade in a sideways range that produces nothing but flat returns as investors grapple with unappealing valuations and juicy alternatives in the form of risk-free bonds and money market funds, according to a Friday note.
"We see two potential problems," Goldman Sachs' Peter Oppenheimer wrote. "The first is that the US equity market, long a significant outperformer, remains expensive relative to history and relative to real rates."
The second problem is the fact that investors can opt for a guaranteed, risk-free return of about 5% in the form of short-term treasury bills and money market funds. That means there is a high hurdle rate equities need to overcome to be attractive enough for investors to consider, and $4
So far, it's the risk-free cash assets that are winning, with fund flow data showing that money market funds attracted $117 billion $4, according to data from $4 That represents the biggest week of inflows since 2020 when investors were flocking to safety amid the onset of the COVID-19 pandemic.
"Cash rates are hiker and, with zero risk and volatility, cash and short duration debt look very attractive relative to equities. This is particularly so given that the US 10-year bond yield is well above the dividend yield," Oppenheimer wrote.
The S&P 500 currently has a dividend yield of about 1.60%, less than half the US 10-Year Treasury yield of 3.45%.
And the risk-reward profile of the stock market isn't about to get better anytime soon, as Goldman expects flat earnings growth this year and just 5% earnings growth in 2024, meaning that valuations are likely to stay elevated unless a significant sell-off takes place.
"If, as we expect, global economies avoid recessions this year and inflation continues to moderate, the fundamental backdrop for equities would look more attractive for longer-term investors. But valuations are not yet compelling enough to offer a great risk/reward, particularly given expectations for modest profit growth in the near term," Oppenheimer concluded.