Groling Powell causes Goldman Sachs to cut its target price for the S&P 500 Index. sec.

During the height of the bull market — which, boy, seems a long time ago — the crazy punters who populate the Wallstreetbets channel had a favorite meme to explain why stocks keep rising.

“Money Printer Go Brrr” featured Federal Reserve Chairman Rambo, Jay Powell, bent on dollars for whoever could collect them.

Well, now “Jay Powell Go Grrr” would be more appropriate. The trader-friendly cash keeper has turned into a roaring bear that raises interest rates.

And investors are not happy. Nasdaq Composite,
-6.15%And the
Rich in the type of stocks — Apple, Tesla and Nvidia — once beloved by short-term option buyers, they’re down 29.3% this year, once again shrugging off summer lows. The latest AAII survey shows retail traders at their most pessimistic since 2009.

Now Goldman Sachs cites Powell’s expected rate hikes as a reason to cut the S&P 500 SPX,
-0.84%
Year-end target of 4300 to 3600.

“The expected trajectory of interest rates is now higher than we previously assumed, tilting the distribution of stock market results below our previous expectations,” David Kostin, chief US equity strategist at Goldman Bank, wrote in a note.

When Goldman Sachs lowered its year-end S&P 500 price target in May from 4700 to 4300 (it started the year with 5100), the market was expecting the Fed to stop the cycle hiking around 3.25%. Traders now believe the final interest rate will be 4.6%, and Goldman Sachs economists see a potential hike for the fed funds rate to 4.75% by next spring.

This pushes real 10-year Treasury yields up sharply, and Goldman notes that they have risen from minus 1.1% at the start of the year to 1.3%, the highest level since 2011. The bank expects it could reach 1.25% by the end of 2022, before peaking at 1.5%. This is not good for stocks.

Source: Goldman Sachs

“The relationship between stocks and rates is dynamic,” Kostin notes. The drivers of changes in real returns determine the impact on equity valuation. The increasing weight of high-growth technology companies in the index has also increased their duration and rate sensitivity.”

The S&P 500 futures price/earnings, which was 21 at the beginning of the year when real interest rates were negative, is down to 16 now.

“However, in the past few weeks, the relationship has erupted; stock valuations have fallen from their recent peak but are still trading above the level indicated by the recent relationship to real rates. Based on the recent relationship only with real returns, the S&P 500 should trade at a multiple of 14x rather than of the current multiplier of 16x,” says Kostin.

And then lowered its target price. The good news is that 3600 is just 4.1% lower than Thursday’s close. Kostin believes a year-end rise to 4,300 is “possible if inflation shows clear signs of abating”.

Source: Goldman Sachs

The bad news is that Goldman believes the risks are skewed to the downside. Stubborn inflation, so the Fed could cause a recession. Goldman economists put a 35% chance of that happening in the next 12 months.

“In a recession, we expect earnings to decline and the yield gap to widen, pushing the index as low as 3150,” Kostin says.

markets

Wall Street faces another bearish day, with the S&P 500 futures contract ES00,
-1.39%
1% discount to 3735. 10-year Treasury yield TMUBMUSD10Y,
3.746%
It rose 5.4 basis points to 3.769%. Fears of a global slowdown prompted WTI CL.1 futures,
-3.45%
It fell 2.1% to $81.70 a barrel.

commotion

DXY dollar index,
+ 0.76%
It moved above 112 for the first time in 20 years as worries about the European economy and Italian election anxiety pushed the EURUSD,
-0.85%
Less than $0.98.

Economic data due on Friday The S&P includes the US manufacturing and services PMI report, both released at 9:45 PM ET. The US central bank is hosting a “Fed Listens” event, starting at 2 p.m. ET, with opening remarks from President Jay Powell.

The Grinch’s early seasonal prize goes to Citigroup’s Dirk Wheeler, who predicted investors won’t be expecting Rally Santa this year.

Britain’s new Chancellor of the Exchequer, Kwasi Quarting, presented a mini-budget on Thursday. Rich in fluctuation theory, it has pledged income and property tax cuts, and has estimated the cost of six months of energy subsidies at 60 billion pounds ($67 billion). Notable financial incontinence in the UK saw gilded returns TMBMKGB-10Y,
3.762%
Rising to a 12-year high, the British pound against the US dollar,
-1.57%
It reached its lowest level in 37 years.

Shares in Credit Suisse CSGN,
-10.18%
It fell more than 8% to multi-year lows on reports that the embattled bank may have to raise capital as it seeks restructuring.

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Over the past 12 months, more than half of the closing bells have been “accompanied by a sad trombone,” says S&P chief investment strategy Dow Jones, in a note published Thursday morning, Benedik Voros. With this concern, investing in stocks with lower volatility was a better bet.

“For savvy factor followers, the S&P 500 Low Volatility has been somewhat of a beacon of hope. By disproportionately capturing more upside than downside, Low Vol delivered a positive 12-month return of 1.2%, versus a loss of 11.6% for the S&P 500 “.

Source: S&P Dow Jones Indices

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