Goldman Sachs’s Top Trades Reveal Uncomfortable Truth

(Bloomberg Opinion) -- It’s that time when Wall Street firms start releasing their top trade ideas for the year ahead. Goldman Sachs Group Inc. was one of the first out of the box, and its suggestions reveal a lot about the supercharged environment for risky assets such as stocks that investors have enjoyed in the pandemic era without actually saying much.

Barring anything unexpected, the S&P 500 Index is poised for its third consecutive year of above average returns. Through Tuesday, the benchmark had gained about 25% for the year, building upon the 16.3% surge in 2020 and the 28.9% rally in 2019. And yet the best Goldman can muster when it looks at the equities markets is to recommend investors have exposure to Mexican and Russian shares in U.S. dollars, as well as going long Egyptian shares, according to Bloomberg News.

The fact that the Goldman doesn’t have another year of outsized gains for the S&P 500 as one of its top ideas is concerning — and not just because stock valuations are near the highest on record based on price-to-earnings ratios and other metrics. The lack of conviction is probably most notable because the firm was one of the more bullish firms on stocks entering 2021, with a year-end forecast of 4,300 for the S&P 500. (It’s around 4,660 now.)

It’s not that Goldman Sachs thinks there’s a crash ahead. The firm’s 2022 forecast of 4,900 on the S&P 500 is among the highest on Wall Street, according to Bloomberg News. But the call implicitly acknowledges that the headwinds for the stock market are becoming much stiffer.

Perhaps the single-biggest factor behind the run-up in stocks both in the U.S. and globally have been government and central bank largesse — and both are coming to an end. The aggregate money supply in the U.S., China, euro zone, Japan and eight other developed economies soared by a record $14 trillion in 2020 to end the year at $96 trillion, according to data compiled by Bloomberg. This year it has grown at a much smaller rate, rising only about $4 trillion to $100 trillion — a figure that has been little changed since May.

With the money supply no longer growing, the question becomes what else is there to keep valuations at their current lofty levels. Continued ultra-low interest rates and earnings growth? Neither are looking very compliant at the moment.

Faster inflation has top central banks led by the Federal Reserve looking to pull back on their historic monetary stimulus programs implemented in the early days the of pandemic. The collective balance sheet assets of the Fed, the European Central Bank, the Bank of Japan and the Bank of England shot up from about 36% of their countries’ total gross domestic product at the end of 2019 to 54.9% at the end of 2020, but the rate of growth has slowed in recent months to 59.2% as of Oct. 31, Bloomberg data show. The Fed this month will start to taper the $120 billion a month it was pumping directly into the bond market, cutting it to zero by mid-2022.

As for corporate earnings, analysts seem hesitant to forecast another year of above-average growth in 2022. They see the S&P 500’s earnings per share falling back to more normal growth rates, rising 8% to $224 from a forecasted $207.50 this year, according to data compiled by Bloomberg.

To be sure, there’s no law of averages that says stocks can’t continue to generate heady returns. The consumer looks to be in good shape, and corporate profit margins are holding up in the face of faster inflation. Indeed, the epic rally of the late 1990s lasted five years, with gains for the S&P 500 ranging from a low of 19.5% to a high of 34.1%. Still, the odds of performance anything like that being repeated are looking smaller every day.   

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Robert Burgess is the executive editor for Bloomberg Opinion. He is the former global executive editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.

©2021 Bloomberg L.P.