Stock markets are in for a wild ride next year as they don’t yet reflect the risk of a U.S. recession, according to strategists at Goldman Sachs Group Inc. and Deutsche Bank.
The team including Christian Mueller-Glissmann and Cecilia Mariotti said their model implies a 39 per cent probability of a U.S. growth slowdown in the next 12 months, but risk assets are only pricing in an 11 per cent chance. “This increases the risk of further recession scares next year,” they wrote in a note on Monday.
Deutsche Bank’s Binky Chadha, meanwhile, expects the S&P 500 Index to slump to 3,250 points — 19 per cent below current levels — in the third quarter as a recession begins, before rebounding in the fourth quarter.
Their calls are a warning after equities rallied sharply in the past two months on bets that a peak in inflation will lead to a softening of hawkish central bank policies. The Goldman strategists said that while monetary policy should become less of a headwind next year, slowing global growth will keep stocks under pressure.
“Equity risk premia appear low considering elevated recession risk and uncertainty on the growth/inflation mix,” the Goldman strategists wrote, with stock drawdown risk higher amid weak growth and volatility, coupled with high valuations. The S&P 500 trades at 17.5 times its forward price-to-earnings ratio, above its 20-year average of 15.7 times.