Goldman Doesn't Fear Equity Bear Market Even as Rally Heats Up

The rally that’s set equities on fire in 2018 raises the risk of a market correction, though a bear market is unlikely, says Goldman Sachs Group Inc.

In a year that investors have kicked off with optimism over economic data and American tax reform, global stocks are trading at records, near their priciest levels in more than a decade. That’s prompted a word of caution from Goldman Sachs, which notes that the MSCI World Index and the MSCI Emerging Market Index are on their longest ever streaks without a 5-percent and 10-percent correction respectively. Still, losses are unlikely to extend into bear territory, write the strategists who remain overweight on equities as an asset class.

“So far this year, risk appetite has picked up materially, nearing its all-time high, led by equities,” Goldman analysts including Ian Wright said in a Jan. 8 note. “While we think equity correction risk in 2018 is high after a strong rally and at high valuations, we also think an equity bear market is unlikely given the supportive macro backdrop.”

Major stock benchmarks from the U.S. to Asia are in overbought territory this year, signaling the risk-on sentiment has been broad based. Providing support to the bulls, analyst upgrades to global profit estimates last week outnumbered downgrades by the biggest margin, according to Citigroup Inc. data.

Goldman is underweight bonds in 2018 and favors emerging-market assets over developed ones, especially in equities.