Powell’s growl causes Goldman to cut its S&P 500 price target yet.

During the heyday of the bull market – which, boy, it seems so long ago – the crazy call options punters who inhabited the Wallstreetbets channel had a favorite meme to explain why the stocks would continue to rise.

“Money Printer Go Brrr” featured Jay Powell, chairman of the Federal Reserve, Rambo-style, boldly throwing green bills to anyone who could collect them.

Well now “Jay Powell Go Grrr” would be more suitable. The trader-friendly monetary vigilante has turned into a snarling bear hike in interest rates.

And the investors are not happy. The Nasdaq Composite COMP,
rich with the type of shares – Apple, Tesla, Nvidia – previously loved by short-term option buyers, this year is down 29.3% and still flirts with summer lows. The latest AAII sentiment survey shows individual traders at their most pessimistic time since 2009.

Now Goldman Sachs Cites Powell’s Expected Rate Hikes As Reason To Lower Its S&P 500 SPX
year-end target from 4,300 to 3,600.

“The expected path of interest rates is now higher than we previously assumed, which skews the distribution of equity market results below our previous forecasts,” writes David Kostin, Goldman’s chief equity strategist in a statement. United States.

When Goldman slashed its end-of-year S&P 500 price target in May from 4,700 to 4,300 (it started the year with 5,100), the market expected the Fed to break its bullish cycle at around 3.25%. Now traders estimate that the so-called terminal rate will be 4.6% and Goldman economists are seeing a possible spike in the Fed funds rate to 4.75% by next spring.

This is pushing 10-year real treasury yields up, and Goldman notes that they have risen from minus 1.1% at the beginning of the year to 1.3%, the highest since 2011. The bank expects that could reach 1.25% by the end of 2022, before reaching a peak of 1.5%. Not good for stocks.

Source: Goldman Sachs

“The relationship between equities and interest rates is dynamic,” notes Kostin. “The drivers of changes in real yields determine the impact on equity valuations. The growing weight of high-growth tech companies in the index has also increased its duration and rate sensitivity. “

The price / earnings forward multiple of the S&P 500, which was 21 at the start of the year when real interest rates were negative, has now fallen to 16.

“However, in the past few weeks, the relationship has been dislocated; equity valuations have fallen from their recent peak, but are still trading above the level implied by the recent relationship to real rates. Based solely on the recent relationship to real returns, the S&P 500 Index should trade at a multiple of 14x rather than the current multiple of 16x, ”says Kostin.

Hence the cut in the price target. The good news is that 3,600 is just another 4.1% lower than the close on Thursday. And Kostin believes a year-end rally to 4,300 “is possible if inflation shows clear signs of easing.”

Source: Goldman Sachs

The bad news is that Goldman thinks the risks are on the downside. Stubborn inflation, and therefore a persistently aggressive Fed, can cause a recession. Goldman economists place a 35% chance that this will happen in the next 12 months.

“In a recession, we expect earnings to decline and the yield gap to widen, pushing the index to a low of 3150,” says Kostin.


Wall Street faces another bad day with the S&P 500 ES00 futures contract
1% discount at 3735. 10-year Treasury yield BX: TMUBMUSD10Y
it was up 5.4 basis points to 3.769%. Fears of a global slowdown drove WTI CL oil futures
down 2.1% to $ 81.70 a barrel.

The buzz

The DXY dollar index
moved above 112 for the first time in 20 years as concerns about the European economy and fear of Italian elections pushed the euro EURUSD
less than $ 0.98.

Economic data coming in on Friday includes the S&P, US manufacturing and services PMI flash reports, both released at 9:45 pm Eastern. The US central bank will host its “Fed Listens” event, starting at 2:00 pm Eastern, with the keynote address by President Jay Powell.

The Grinch award at the start of the season goes to Citigroup’s Dirk Willer, who predicted that investors shouldn’t expect a Santa Rally this year.

The new UK Chancellor of the Exchequer, Kwasi Kwarteng, handed in a mini-budget on Thursday. Packed with trickle theory, he promised income and property tax cuts and set the six-month cost of energy support at £ 60 billion ($ 67 billion). Perceived Fiscal Incontinence In The UK Saw BX Gilt Returns: TMBMKGB-10Y
rise to a maximum of 12 years and again GBPUSD in sterling
hit a 37-year low.

Credit Suisse CH Shares: CSGN
plunged more than 8% to new multi-year lows according to reports that the besieged bank may need to raise additional capital as it seeks to restructure.

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Which is worse for you: inflation or recession

The graph

Over the past 12 months, more than half of the closing bells of the sessions “have been accompanied by sad trombones,” said Benedek Vörös, director of index investment strategy at S&P Dow Jones Indices, in a statement published Thursday morning. Under that fear, investing in low volatility stocks was a better bet.

“For the shrewd followers of the factors, the S&P 500 Low Volatility was in some ways a beacon of hope. By disproportionately capturing more ups than downs, Low Vol had a positive return of 1.2% in 12 months, versus an 11.6% loss for the S&P 500, ”he notes.

Source: S&P Dow Jones indices

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