Goldman Sachs: The stock market faces a correction risk but will not fall into a bear market

Investing.com - Goldman Sachs states that amid rising geopolitical tensions and concerns over increased AI spending, global stock markets face a higher risk of a near-term correction, but the firm does not expect a full-blown bear market.

In a report on Wednesday, a team of strategists led by Peter Oppenheimer noted: “Rising geopolitical uncertainty and growing anxiety over AI capital expenditure and disruptive impacts together pose significant short-term headwinds that markets need to digest.”

They added that after an unusually strong rebound in stocks since the pandemic lows, especially in the U.S. market, recent risks seem more pronounced.

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Meanwhile, valuations across regions remain high. Although the U.S. market has been long overvalued due to strong profit growth and high equity returns, recent gains have extended beyond the U.S., leading strategists to note that “valuations across all regions are now above their long-term historical levels.”

At the same time, stock risk premiums have fallen sharply and are “mostly back to pre-financial crisis levels,” making markets more vulnerable to shocks related to technological competition or changes in growth and inflation outlooks. The development of the Middle East situation could exacerbate these risks, the strategists said.

Goldman Sachs also pointed out significant rotations beneath the surface of the market. Anxiety over tech stock valuations and large-scale capital expenditure plans has driven funds away from longer-duration tech stocks toward companies related to tangible investments and infrastructure.

The strategists stated this has created “one of the weakest periods for the tech sector relative to other sectors in the past 50 years.”

These shifts are accompanied by a broader rotation from growth to value stocks and narrowing valuation gaps between sectors, making the index levels more sensitive to macro risks such as energy supply disruptions and tightening financial conditions.

However, despite these headwinds, Goldman Sachs believes the broader environment should limit the severity of any declines. The team wrote: “We believe that the depth and scope of any pullback could be limited, and the risk of evolving into a bear market is relatively low.”

The strategists pointed out that resilient economic growth, solid profit momentum, and healthy private sector balance sheets are key factors that should provide some buffer for stocks. Historically, geopolitical shocks tend to cause relatively short-lived declines, with median market corrections of about 6% over approximately 18 days during such events.

While acknowledging that the current valuation levels increase the risk of a correction, the strategists said such a pullback could ultimately present buying opportunities for investors. They wrote: “We continue to recommend broad diversification across regions, factors, and sectors as a way to improve risk-adjusted returns.”

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