Stocks are still in rally mode after the Nasdaq Composite (^IXIC) had its best first six months of the year in four decades and the S&P 500 (^GSPC) gained 16% during the same period.
So where are stocks headed in the second half of 2023? Expect them to stay “fat and flat,” said Goldman Sachs analysts.
As the Federal Reserve has hiked interest rates in its battle against inflation, a big question for investors has been whether the central bank can achieve a soft landing or an economic slowdown without a recession in the US.
Strong economic data has prompted Wall Street economists to reconsider their expectations for a recession this year.
Goldman Sachs analysts wrote that “while a US soft landing with inflation normalizing remains our economists’ base case, there are lingering risks.”
“As a result, we expect equities to remain stuck in their ‘fat and flat’ range,” Goldman Sachs' Christian Mueller-Glissmann and his team wrote in a Friday note to investors.
In June, Goldman Sachs economists lowered their prediction for a US recession over the next 12 months to 25% from 35%. Yet Mueller-Glissman and his team warn “inflation could prove to be more sticky from here, triggering hawkish central bank surprises.”
June’s inflation reading showed a 3% year-over-year rise in the Consumer Price Index, its slowest annual increase since March 2021.
Cooling inflation and mixed economic data have economists debating whether the central bank will indeed hike rates two more times this year. June's 3% inflation reading is still higher than the Federal Reserve's 2% target.
Goldman analysts also point to global growth data in China and Europe, which has been mixed.
“China data has disappointed materially since Q2 and in the Euro area a weak global manufacturing sector has started to spill over to services,” the note said. “One of the risks we see for 2H is that global PMIs could start to weigh on earnings revisions, especially as inflation normalizes at the same time.”
Meanwhile, Goldman notes that risk appetite for stocks “picked up materially in June.”
The markets so far have been buoyed by big-cap tech names like Nvidia (NVDA) which hit another all-time high on Friday.
Shares of Apple (AAPL) are up nearly 50% this year, and Tesla (TSLA) gained 127% during the same period.
While analysts initially warned of a narrow breadth to the rally this year, investors have been venturing into other names hitting 52-week highs. Even the highly shorted stocks are joining the rally.
