The S&P 500 will not break above its range soon, says Goldman Sachs. Here are 6 reasons why.

However, Goldman Sachs reckons the U.S. market — and many of its international peers — will remain in what it terms the ‘Flat and Fat’ range for some time.

True, there are reasons to be positive, says the Goldman portfolio strategy research team led by Peter Oppenheimer. The bank’s economists see developed economies growing at a below-trend pace, but avoiding recession as low unemployment supports consumption. In the U.S., the ISM manufacturing index increased above consensus expectations in April, for example.

Yet, the banking sector ructions are tightening credit conditions and will weaken economic growth much more in the second half of the year, says Goldman.

And the bank then lists six factors that may keep the lid on any market gains.

First, inflation remains sticky. “The tightness of the labor market continues to be a double-edged sword, supporting consumption on the one hand, but contributing to a higher-for-longer risk of inflation on the other.”

Yes, U.S. interest rates may have peaked at the 5%-5.25% range, but contrary to market hopes of imminent cuts, Goldman reckons they will stay there until the second quarter of 2024.

Second, investors are “pricing in the best of all worlds”, where inflation moderates and rates fall but there is no recession.

“One risk is that there is a recession -– or at least the market prices a higher probability of one -– perhaps if unemployment starts to rise because of bank lending tightening. Our U.S. strategists expect that under these conditions, S&P 500 earnings per share would fall to $200 and the S&P 500 would decline to 3150,” says Goldman.

Next, such scenarios could cause problems because equity valuations remain high. “At 18.8x [price-to-earnings], the U.S. equity market trades well above its 20-year median (a period during which low interest rates led to quite high valuations),” the Goldman team write.

“Furthermore, high cash returns mean that there are now reasonable alternatives (TARA) and that provides a very high bar for equities. Equity risk premiums have fallen sharply over the past year, implying relatively low prospective returns compared with risk free assets,” they add.

Fourth, equity volatility, as measured by the CBOE VIX index
VIX,
-5.48%,
remains too low and implies a reasonable degree of complacency, particularly surprising given chances of the debt ceiling being breached by the start of June, Goldman notes.

Fifth, the recent better-than-expected results season is priced in and earnings growth will not be great in coming quarters.

“Our forecasts remain at roughly flat earnings growth in most regions this year and 5% in 2024 for the U.S. and Europe, 6% for Japan and 17% for Asia. With high valuations, the combination does not offer much return for the risk in the face of 5% risk free U.S. dollar cash return.”

Finally, market concentration is a problem. The largest 15 companies have generated 90% of the S&P 500’s rally for 2023 so far, Goldman notes.

“Our U.S. strategy team finds that market breadth has fallen to one standard deviation below average for the first time since 2020. The problem is that when returns get very narrow it is not a good sign. Following 9 sharp declines in market breadth since 1980 (similar to recent experience) the S&P 500 then went on to post below-average returns and larger peak-to-trough drawdowns,” the Goldman team conclude.

Markets

Stock-index futures
ES00,
+0.67%

YM00,
+0.49%

NQ00,
+0.66%
are firmer and so are government bond yields
TMUBMUSD10Y,
3.409%.
The dollar
DXY,
-0.12%
is little changed while oil
CL.1,
+2.64%
rallies and gold
GC00,
-0.43%
dips.

Try your hand at the Barron’s crossword puzzle and sudoku games, now running daily along with a weekly digital jigsaw based on the week’s cover story. To see all puzzles, click here.

The buzz

Top datapoint on Friday will be the nonfarm payrolls report for April, released at 8:30 a.m. Eastern. Economists forecast that a net 180,000 jobs were created last month, down from 236,000 in March. The unemployment rate is expected to rise fractionally from 3.5% to 3.6%, and the month-on-month increase in hourly wages will be the same at 0.3%.

The other economic release is the March consumer credit report at 3 p.m.  And Fedspeak returns, with St. Louis Fed President Bullard due to make comments at 1 p.m.

The earnings season is starting to wind down, but on Friday we’ll still get, among others, AMC Entertainment
AMC,
+3.14%,
Warner Bros Discovery
WBD,
-3.90%,
and CBOE
CBOE,
-0.90%,
all before the opening bell.

Other recent earnings will make their presence felt in Friday’s market. Notably Apple
AAPL,
-0.99%.
Shares are up 2% in premarket action after the iPhone maker beat expectations with its fiscal second-quarter report and promised billions more to investors in share buybacks and dividends.

Read: Apple hands Warren Buffett’s Berkshire Hathaway a $214 million payout ahead of shareholder weekend

Icahn Enterprises stock
IEP,
-7.61%
is rebounding more than 11% after activist investor Carl Icahn’s company said it would pay out $2 per unit and it does not face a liquidity problem. Icahn Enterprises has been under a cloud after a short seller report earlier this week accused it of inflating its value.

Lyft Inc.
LYFT,
-1.84%
shares are off more than 16% after the new chief executive’s quarterly guidance came in light on revenue and adjusted earnings.

The U.K. pound
GBPUSD,
+0.31%
hit a one year high versus the dollar, topping $1.26, ahead of the Bank of England’s interest rate decision next week.

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The chart

The trend among retail investors of buying badly hammered stocks, almost regardless of how bad are the underlying company’s prospects in the hope of riding a massive rebound, has drawn funds into the struggling financial sector. It’s not gone well, as this chart from Vanda Research shows.

“There’s nothing wrong with buying assets on the cheap, but when prices continue sliding, that affects both capital available to dip into other opportunities (e.g., tech) and risk appetite. That’s what we continue to see with the performance of retail’s recent investments in financials and banking stocks, which are now suffering a staggering 32% loss in just over two months,” says Vanda Research.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

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