Observing this round of US stock market correction, Goldman Sachs has drawn 7 conclusions

After the sharp drop on Tuesday, the S&P 500 index fell by 6% in just three trading days. Due to concerns about the sustainability of US economic growth, market volatility has increased, with the VIX index soaring from 16 to 39, reaching its highest level since October 2020.

Does this round of sharp decline mean the end of the stock market's rise this year? How should investors protect themselves in the midst of market turmoil? Which sectors are worth paying attention to? On Tuesday local time, Goldman Sachs analyst team led by David J. Kostin delved into historical experience and the current macro environment, and came up with the following 7 conclusions:

1. There is still room for the S&P 500 index to rise this year

Goldman Sachs pointed out that although the magnitude of this adjustment is noticeable, it is still moderate compared to typical year-to-year market fluctuations. So far this year, the S&P 500 index has maintained an upward trend, with a cumulative increase of over 9%.

Looking ahead, Goldman Sachs maintains its target price for the S&P 500 index at 5600 points by the end of 2024, which is about 8% higher than the current level. However, in March, Goldman Sachs set the target price at 6000 points.

Goldman Sachs believes that the US economy will continue to expand, with earnings growth of 8% in 2024 and 6% in 2025, and the index's P/E ratio will remain at 20 times, roughly consistent with the current P/E ratio.

The Consumer Discretionary sector has become a focus, with a 9% decline in the past week, and it is the only sector in the S&P 500 with a negative return year-to-date (-3%). Due to a weak labor market, investor concerns about consumer spending remain high.

Meanwhile, the Information Technology sector fell by 7%. Market sentiment towards AI profit prospects has shifted from optimistic to doubtful, leading to a 10% plunge in the semiconductor sector.

2. Insights from history

Goldman Sachs research points out that historically, investors who buy the S&P 500 index after a 5% decline usually make a profit.

Since 1980, investors who bought the S&P 500 index when it was 5% below its recent high have had a median return of 6% over the following three months, with positive returns in 84% of cases.

3. Economic Growth and Cyclical Stocks

Despite the poor performance of cyclical stocks, Goldman Sachs believes that the US stock market has not fully priced in a recession, as evidenced by the fact that trading between cyclical and defensive stocks has been roughly in line since the end of the first quarter this year.

Goldman Sachs expects the US economy to continue growing, with real GDP growth rates of 2.7% and 2.3% expected in 2024 and 2025, respectively.

4. Rate Cut Expectations and Defensive Sectors

Goldman Sachs points out that the recent shift in the US stock market from cyclical stocks to defensive stocks is one of the most dramatic rotations in recent years Market expectations for the Fed to start cutting interest rates this year, Goldman Sachs said that rate cuts typically benefit defensive sectors such as utilities, communication services, and consumer goods.

Goldman Sachs believes that the Fed will cut rates by 25 basis points at the September, November, and December meetings, and as long as the economy is not on the brink of recession, the S&P 500 index will rise when the Fed starts cutting rates.

5. Attractiveness of Stable Growth Stocks

Goldman Sachs believes that its stable growth stock basket (GSTHSTGR) is a strong investment strategy for investors concerned about the slowdown in the U.S. economy, with a return of 9% for the basket stocks this year.

The basket includes the 50 most stable EBITDA growth stocks in the Russell 1000 index over the past 10 years. Despite trading at a 24% premium to the S&P 500 index in terms of forward P/E ratio, it is lower than the peak period by over 50%, and valuation is not a significant predictor of future returns.

Goldman Sachs stated that during times of rising economic policy uncertainty, such as the upcoming 2024 U.S. presidential election, these stocks historically perform better.

6. Valuations of Large Tech Stocks Remain Reasonable

Goldman Sachs pointed out that large tech stocks have recently experienced a significant decline, with the P/E ratio dropping from 32 times to 27 times, but still higher than the median of 24 times over the past decade.

This indicates that despite concerns in the market about the timing and scale of AI investment returns, the valuations of large tech stocks still reflect investors' optimism about the prospects of AI.

7. Concerns of Economic Recession May Pressure Small-Cap Stocks

Goldman Sachs believes that the components of the Russell 2000 index will be more affected by economic growth rather than interest rate cuts.

Although rate cuts theoretically should alleviate financial pressure on small companies and reduce capital costs, the market's weakened expectations for economic growth have put pressure on cyclical stocks, including small-cap stocks.

In addition, the correlation between the Russell 2000 index and the nominal 10-year U.S. Treasury yield has once again become positively correlated, reflecting the market's positive response to economic news, similar to the situation before 2020