Don’t Hold Your Breath for Big Stock Returns, Says Goldman Sachs

(Bloomberg) -- Investors that didn’t profit from the equity rally in January, missed out on most of the returns for the year, according to Goldman Sachs Group Inc. strategists.

“The dislocation at the outset of the year -- when markets had overpriced the slowdown -- has almost disappeared,” said the strategists led by Sharon Bell. “The rally we expected has happened swiftly, and given this we see relatively modest returns on equities from here."

Global equities staged a powerful rebound in January from a brutal sell-off in the fourth-quarter as investors embraced a dovish U.S. Federal Reserve and optimism that the U.S.-China trade talks would end well. U.S. stocks are now up 16 percent from December lows while European equities have climbed about 9 percent.

But while the recovery has been impressive, many investors still prefer to stay on the sidelines as too many questions about trade and growth remain unanswered and there’s limited consensus about the market’s direction. This has led to thinner trading volume and more muted reactions.

Although Goldman economists expect growth in the U.S. and Europe to stabilize, it won’t regain its earlier pace, supporting the continuation of a “micro market” with more muted swings. Goldman analysts say this “flat and skinny” trading range is especially true for Europe, where earnings growth is seen as very limited and the remaining upside is forecast. Goldman sees the Stoxx Europe 600 Index rising about 4 percent to 375 in 12 months.

“Assuming returns in a trading range and a macro path which is not very strong in either the Euro area or the U.S., we don’t expect very strong factor, style or sector drivers,” said the Goldman strategists.

The analysts still prefer equities with strong balance sheets as well as quality stocks, which can do well in an environment of low returns. Goldman said the outperformance of growth stocks has come to an end but they don’t expect value shares, which typically pay a high dividend, to see strong gains either.

--With assistance from William Canny.

To contact the reporter on this story: Ksenia Galouchko in London at kgalouchko1@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Jon Menon, Monica Houston-Waesch

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