Risk sentiment returns! Goldman Sachs: Overall environment will favor the stock market by the end of the year

Goldman Sachs analysts said in a report on Tuesday that after a brief risk aversion in the summer, risk appetite has returned, which should support the stock market rather than bonds in the coming months.

They wrote that US stocks will offer more attractive returns than bonds, as the late-stage economic cycle environment supports higher-risk assets.

In the late stage of the economic cycle, as the economy approaches its peak and the Fed prepares for potential slowdown by easing policy, unless growth momentum slows or accelerating inflation leads to policy tightening, risk assets are usually favored.

Analysts noted that the situation has been the opposite in recent months. With accelerating US economic growth and easing inflation, strong economic data and loose policies have driven an environment more supportive of risk assets.

They pointed out that in July, after concerns about bullish sentiment and slowing growth triggered a correction in the stock market, analysts downgraded stock ratings to neutral and upgraded bond ratings to neutral, but the stock market quickly rebounded thereafter.

Analysts said, "After the 'risk-off' in the summer, due to the Fed's dovish turn, Chinese stimulus measures, and better-than-expected US data, risk assets quickly recovered."

Goldman Sachs has now upgraded stock ratings to buy, downgraded bond ratings to sell, and explained that the risks facing global stock markets are currently low.

"Global stock markets have remained relatively flat after the volatility. Better US data and supportive policies have helped reduce near-term downside risks," they said.

Analysts believe that as long as the economy avoids a recession, the Fed's rate-cutting cycle tends to support risk assets. They predict that with strong labor market data and the Fed's significant 50 basis point rate cut last month, the risk of an economic recession seems low, with the possibility of a recession next year dropping to just 15%.

Analysts said that risk appetite and the late-stage economic backdrop mean that as bonds face downside risks, stocks will benefit from higher profit growth and valuations.

Analysts said, "In the late stage of the economic cycle, stocks can offer attractive returns driven by profit growth and valuation expansion, while total bond returns are usually limited by narrowing credit spreads and rising US bond yields."

The analysts added that while the current environment supports higher-risk investments, the stock market still faces the possibility of volatility due to geopolitical conflicts, the US election season, and adverse trends in growth and inflation.

However, they stated that even this uncertainty could push up risk assets.

They said, "We believe that easing uncertainty can also support risk assets until the end of the year, which is why we prefer to be long selectively hedged rather than maintain a neutral stock strategy."