Goldman Sachs report: The outlook for the Federal Reserve’s monetary policy will increase short-term volatility in U.S. stocks, and earnings growth will remain the core driver in the medium and long term
The latest strategy report released by the group's Ben Snider research team points out that the mid- to long-term trend of U.S. stocks will still be dominated by corporate earnings growth, but if the Federal Reserve starts to raise interest rates in the future, the stock market will face periodic correction pressure in the short term. Historical data shows that after the start of seven interest rate hike cycles in the past few decades, the S&P 500 Index returned an average of -2% in the subsequent three months. However, in the above seven cycles, the average return of the S&P 500 Index 12 months after the first interest rate hike reached 9%; except for the 2022 interest rate hike cycle, all other cycles recorded positive returns 12 months after the first interest rate hike. The report pointed out that the recent trends of stocks with weak balance sheets are highly bound to the Fed's interest rate expectations, and such equity assets remain highly sensitive to changes in the outlook for monetary policy. Specifically, the High Floating Rate Debt Equity Portfolio (GSXUHIFL) has recently shown a significant correlation with short-term interest rates. Goldman Sachs further emphasized that the current U.S. stock market has basically digested expectations of short-term interest rate hikes. If the Federal Reserve's monetary policy turns dovish in the future, it may be a positive factor that catalyzes the rise of the stock market.