Goldman Sachs: The probability of a bear market in the US stock market is low, and the Federal Reserve is more likely to cut interest rates by 25 basis points in September

Source: Jinshi Data

Macro and policy uncertainties have brought warning signs of further volatility to the stock market in recent weeks, but Goldman Sachs analysts said the risk of U.S. stocks falling into bear market territory, that is, a larger correction, looks small.

According to the bank, the risk of investors withdrawing their funds is high amid overvalued valuations, mixed macro outlooks and policy uncertainty.

While these factors could trigger volatility and erode returns in the coming months, Goldman Sachs noted that there is little reason to believe that U.S. stocks will fall 20% from recent highs.

"We believe that the risk-adjusted return on stocks may be low by the end of the year. However, we believe that bear market risks remain low and recession risks are relatively low, thanks to a healthy private sector and the Fed's accommodative policy," analysts wrote in a report on Tuesday.

They noted that the risk of a retracement has risen to about 20%, which is still relatively low. Analysts said history suggests a risk of more than 30% would be a "clear warning sign." "We are slightly risk-on for the next 12 months," the analysts said. They also noted that bear markets characterized by pullbacks of more than 20% from recent highs have become less common since the 1990s due to longer economic cycles, lower macro volatility and a larger policy "buffer" from the Federal Reserve. The firm's outlook comes as U.S. stocks have been volatile in recent months amid volatility sparked by weaker-than-expected macro data. U.S. stocks saw a sharp sell-off in early August following the release of the July nonfarm payrolls report, and last week the S&P 500 had its worst week in more than a year as a slightly weaker-than-expected August jobs report sparked fresh growth concerns.

Regarding the extent of the Fed's rate cut, Goldman Sachs Chief Economist Hatzius said on Monday, "I would not rule out a 50 basis point cut, but a 25 basis point cut is more likely." Hatzius added, "I think the Fed has good reason to cut interest rates by 50 basis points because the current federal funds rate is too high. This is the highest policy rate in the G10. This is despite the fact that the United States has actually made greater progress in inflation than most G10 economies."

But Hatzius and his peers believe that taking out such a "big killer" may hurt market sentiment.

Bank of America U.S. economist Aditya Bhave said in a client report, "We believe that such an aggressive rate cut is unnecessary based on the information we have at hand. Moreover, if the Fed starts with a 50 basis point rate cut, the less dovish forward guidance, whether through speeches by Fed officials or dot plots, may lose credibility."

Investors generally expect the Fed to start cutting interest rates at its policy meeting next week. According to the CME's "FedWatch" tool, most people expect the Fed to cut interest rates by 25 basis points, and the market expects a 100 basis point cut by the end of this year.