By Senad Karaahmetovic
"The bear market is not over" is what Goldman Sachs strategists told the bank's clients in today's note.
They believe the conditions, which are typical for an environment where equities bottom, have not yet been reached. The strategists expect lower valuations from here, which should coincide with a "trough in the momentum of growth deterioration and a peak in interest rates." Only then, a sustained recovery could begin, they wrote in a note.
The Fed continues to aggressively increase interest rates in a bid to cool inflation. Goldman Sachs analysts expect the FOMC to slow the pace of rate hikes, although their expectations are still above the current consensus.
The strategists see the speed at which the Fed is raising rates as damaging for valuations.
"We continue to think that the near-term path for equity markets is likely to be volatile and down before reaching a final trough in 2023. So while near-term risks are to the downside in global equities, it is likely that they enter a 'Hope' phase in 2023; we expect overall returns between now and the end of next year to be relatively low," the strategists added.
Along these lines, Goldman Sachs strategists advise clients to take "a barbell approach," which combines "quality, strong balance sheet and stable margin companies with deep value, energy and resources, where valuation risks are limited."
"We like companies that can compound earnings and returns through a combination of reinvestment and dividends over time. In contrast to the last cycle, more diversification across styles and regions, as well as a greater focus on valuation, should enhance returns over the course of 2023," they concluded.