Stocks are headed for a correction before the November presidential election, according to a new research report from Goldman Sachs. And it’s not Donald Trump’s fault.
Analysts at the investment firm expect the Standard & Poor’s 500 to fall 9.7 percent over a three-month horizon. The firm similarly cut its short-term outlook on other global stocks to underweight, forecasting the MSCI Asia Pacific Index (excluding Japan) to fall 3 percent, the Tokyo Price Index (TOPIX) to drop 8.7 percent, and the STOXX Europe 600 to shed 11.3 percent.
The S&P 500 has rallied 6.5 percent after getting jolted following the Brexit, when the U.K. voted to leave the European Union on June 23. Now Goldman Sachs said stocks have gotten pricey, especially after tepid earnings growth.
"There's a price for everything, and the valuations now for equities—admittedly perhaps still cheap relative to bonds—is looking pretty stretched when you look at absolute multiples," Peter Oppenheimer, chief global equities strategist at Goldman Sachs, said on CNBC Tuesday.
Still, despite the downgrade, the firm’s analysts see global stocks rising modestly over the next year and give a neutral rating to equities. It predicts a 1.7 percent gain in returns for the STOXX Europe 600; a 1.6 percent increase in the MSCI Asia Pacific Index (excluding Japan); a 1.1-percent gain in the S&P 500; and a 0.6-percent rise in the Tokyo Price Index (TOPIX).
The firm also put out three-month and 12-month estimates for 10-year government bonds and five-year corporate bonds. Goldman analysts predict returns on U.S. 10-year bonds to fall 2.9 percent over the next three months and slide 5.9 percent over the next 12 months.
Goldman expects returns on investment-grade U.S. corporate bonds to dip 1.1 percent in the three-month time horizon and decline 1.7 percent over 12 months. Returns on high-yield U.S. corporate bonds are expected to fall 2 percent over the short term and to increase 1.1 percent over the long term.