Goldman Sachs downgrades global equities on growth and valuation concerns

“Until we see sustained earnings growth, equities do not look attractive, especially on a risk-adjusted basis. We expect particularly poor returns in dollar terms, with our forecast of a stronger dollar and the prospect of less negative equity/FX correlations,” the bank said.

Goldman remained ‘overweight’ cash on a three-month basis, saying there was potential for higher cross-asset volatility. “We believe the market’s dovish pricing of the Fed increases rate shock risk, in which case both equity and bonds could sell off.”

It upgraded commodities to ‘overweight’, noting it now expects less downside to oil over the three months, given supply disruptions. The bank pointed out that commodities have rallied on the back of the dovish Fed, China data and supply disruptions.

On a 12-month horizon, however, Goldman remained 'neutral', saying the physical rebalancing in oil was incomplete and spot prices should weaken as inventories start to build again in the first quarter of next year.

“We think continued fundamental adjustments in both the physical and capital markets are needed, and now see oil prices reaching $60/bl in 4Q2017 versus mid-2017 previously.”

GS’s key ‘overweight’ remains credit on both a three- and 12-month horizon, where valuations and fundamentals appear supportive. The bank kept its ‘underweight’ view on bonds.

“We highlight five conviction cross-asset themes for a volatile but trendless market: (1) prefer credit to equity, (2) focus on cross-asset carry opportunities, in particular emerging markets, (3) position for pick-up in US inflation, which should drive rotation within equities, (4) oil to outperform metals and drive divergence in equities and credit, and (5) resurgence of divergence, with a focus on FX, which seems best positioned to benefit.”

Meanwhile, Societe Generale said it was not yet time to rotate out of equities, particularly Eurozone stocks.

It said that while uncertainty ahead of the looming EU referendum in Britain and the earnings reporting season seems to be weighing on stocks, equities still offer better value than government bonds, especially in the developed markets.

“To gear to a reflationary environment in the medium term, we see more upside potential from financials and energy stocks, supported by a recovery in earnings momentum and attractive dividend yields. In particular, we recommend building positions in Eurostoxx 50 dividend futures,” the French bank said.