(Bloomberg) -- Goldman Sachs Group Inc. downgraded equities to underweight in its global allocation over the next three months while remaining overweight cash, saying rising real yields and the prospect of a recession suggest the rout has further to run.
The US investment bank’s market-implied recession probability has increased to above 40% following the recent bond sell-off, “which historically has indicated elevated equity drawdown risk,” strategists including Christian Mueller-Glissmann wrote in a note Monday.
“Current levels of equity valuations may not fully reflect related risks and might have to decline further to reach a market trough,” they said, adding that real yields continue to be a major headwind.
Goldman’s views reflect growing investor fears that the Federal Reserve’s resolve to quell inflation will tilt the global economy into a recession and roil financial markets. The MSCI World Index’s members have lost more than $8.4 trillion in market value since a mid-September peak, with some investors saying the moment of capitulation has yet to come.
All of this suggests the days of the TINA -- There Is No Alternative -- mantra for stocks are over, according to the strategists. While falling yields had burnished the appeal of equities since the global financial crisis, “investors are now facing TARA (There Are Reasonable Alternatives) with bonds appearing more attractive,” they wrote.
Goldman’s bearish take on equity allocation comes after its US strategists slashed their year-end target for the S&P 500 Index to 3,600 from 4,300 last week. Similarly, Europe strategists including Sharon Bell have reduced targets for European equity gauges, downgrading their 2023 earnings-per-share growth forecast for the Stoxx Europe 600 Index to -10% from zero.
“This bear market has not yet reached a trough,” Bell and her colleagues wrote about European stocks in a separate note Monday.
In the asset allocation note, Goldman strategists said they have raised the recommendation for credit to neutral over the three-month horizon. Investment grade credit yields are looking attractive in both absolute terms and relative to equities, they wrote.