Synopsis:

Goldman Sachs advises maintaining a defensive stance as market volatility persists, despite not expecting a full bear market.

Key Points:

1. Ongoing Market Volatility:

   • Defensive Stance Recommended: Goldman Sachs suggests that it's prudent to remain defensive amid the current market conditions.
   • Not a Bear Market: While the market is experiencing significant volatility, it is not expected to turn into a bear market.

2. Fundamental Shifts Driving Market Movements:

   • Reflection of Fundamentals: The market correction is seen as a reflection of shifting fundamentals rather than just technical factors and positioning.
   • Earnings and Valuations: Most sectors' performance has been in line with changes in their earnings per share (EPS) revisions over the last month.

3. Triggers for Market Correction:

   • Multiple Factors: Elevated valuations, high expectations into Q2 earnings, market concentration, unwinding of carry trades, and complacency about deteriorating macro momentum are all contributing factors.
   • Complacency and Valuations: The market rally this year has largely been driven by higher valuations, which have increased without corresponding looser financial conditions, indicating growing complacency.

4. Valuation Compression and Future Outlook:

   • Moderate Compression: Although valuations have compressed, they remain relatively high with the S&P 500 price-to-earnings (P/E) ratio still above 20x.
   • Potential Further Declines: Should macroeconomic data weaken further and recession fears rise, the S&P 500 P/E ratio could fall to 18x, translating to an index level of around 4,800 by year-end. This projection is not a recession scenario, where both multiples and EPS would likely decline more significantly.

Conclusion:

Goldman Sachs emphasizes a cautious approach in the face of ongoing market volatility and potential further corrections. While the market is not expected to enter a bear phase, shifting fundamentals and various triggers suggest that maintaining a defensive position is advisable. Valuations, though compressed, are still elevated, and further macroeconomic weakness could lead to additional market adjustments.