“Investor concerns about Fed tightening, surging interest rates, and the risk of recession have outweighed the surprising strength of 1Q earnings reports,” Goldman Sachs strategist David Kostin wrote in a note on Monday. “Results have exceeded expectations and prompted modest upward revisions to estimates for the remainder of 2022 and for 2023, driven largely by the energy sector. However, the boost to analyst estimates has not been enough to offset portfolio manager fears about the downside risk to EPS if the economy falls into recession and the downside risk to valuations as the Fed tightens policy.”
Goldman also reiterated its 35% probability of a U.S. recession within two years.
The cautious comments from the investment bank arrives after a major pickup in stock market volatility as traders fret about interest rate hikes, weak tech earnings, and other key risks.
The Dow Jones Industrial Average plunged 1,120 points last Thursday, or 3.3%. The S&P 500 tanked 3.7%. As for the Nasdaq Composite, it dropped 5.2% for its worst day since 2020. Thursday’s brutal session represented a swift sentiment reversal from Wednesday, when traders breathed a sigh of relief after Federal Reserve Chairman Jerome Powell said that the central bank was not considering a 75 basis-point increase in interest rates.
The Dow Jones Industrial Average soared 932.27 points and the S&P 500 gained 2.99% on Wednesday, the largest gains for the two indices since 2000. Even the beaten-up Nasdaq Composite popped 3.19%.
Market volatility has extended into the new trading week.
Dow Jones Industrial Average futures fell 428 points as of 6:21 a.m. Prices for bitcoin, ethereum and other cryptocurrencies continued to march lower as well.
Goldman’s Kostin points to other market moves as signaling rising recession fears.
“Rotations within the equity market also reflect concerns about recession risk,” Kostin added. “Defensive industries recently have sharply outperformed cyclical industries. The magnitude of cyclical underperformance appears consistent with a steeper economic slowdown than the recent pace of deceleration in metrics such as the ISM.”