Volatility is back in markets after a dead-quiet summer.
And Goldman Sachs’ equity strategists expect that the next move for the S&P 500 will be down.
Goldman forecasts the benchmark index will finish the year at 2,100, about 1% lower than the 2,127 it closed at on Friday.
On Friday, the S&P 500 closed down more than 2%, the first time in 43 trading days the benchmark index closed with a gain or loss of more than 1%.
“‘Fat and flat’ is a catchy phrase, but ‘sideways, down, and up’ more accurately describes the path of the US equity market during the past two months (sideways), our forecast through year-end (down 1%), and recovery during the subsequent nine months (up 4%),” David Kostin, the chief US equity strategist, wrote in a note on Sunday.
“We forecast the S&P 500 will follow a ‘fat and flat’ trajectory over the next 12 months and finish at 2,175, roughly 2% above the current level.”
In his note, Kostin outlines five reasons the stock market’s direction will be down through year-end and basically nowhere over the next year:
- Goldman’s Extreme Sentiment Indicator is at an “extreme bullish” reading of 95 – a statistically significant trading signal that suggests the S&P 500 will fall 2% during the next month. After the chaos of the UK referendum in June, the index was a maximum bearish reading of 0, and the market gained 4% in the following weeks. A rise in political uncertainty will result in a lower price-to-earnings multiple. Prediction markets assign a 70% chance of Democratic nominee Hillary Clinton winning the election, but polls have recently tightened. Recent US economic data, including the Institute of Supply Management’s manufacturing and nonmanufacturing surveys, have been disappointing. This weak data point to downside risks to earnings-per-share forecasts. Stock valuations remain extended. The S&P 500 trades at the 84th percentile of historical valuation, while the median stock is at the 98th percentile.