Goldman hasn’t given up on the stock-market rally, but is starting to get nervous

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Even as the U.S. stock market has been rolling south lately, it appears hope springs eternal for investors when it comes to earnings.

Nearly two-thirds of 409 respondents to a Bloomberg survey are counting on corporate results to boost the S&P 500 index SPX. That’s the highest level of confidence for profits since the question first appeared in October 2022.

Looking at that another way, overconfidence in earnings delivery may be a risk on the horizon for stocks. That’s as beleaguered Tesla TSLA, 1.40% lines up to announced its results later Tuesday, with Microsoft MSFT, 0.96%, Alphabet? GOOGL, 0.90% and Meta? META, 1.92% also due this week.

Read: Technology stocks show signs of ‘breaking down’ ahead of Big Tech earnings

Our call of the day comes from Goldman Sachs strategists Dominic Wilson and Kamakshya Trivedi who talk of “paradise postponed,” and near-term risks that are emerging for stocks. They assure that’s “not fatal.” Yet.

For much of the year, the strategists say they’ve been “quite sanguine” about the effect that no Federal Reserve interest rate cuts this year would have on stocks.

“This is because we have seen upward pressure on rates as mostly having been driven by improving growth prospects; and because, for equities, we think the exact easing profile is less important than that the Fed stands ready to cut if growth falters,” they said.

But they’ve also maintained that “sticky” inflation data would pose a central risk to their longer-term view on stocks. And recent shifts, such as persistent inflationary pressures, are driving home the possibility of no Fed cuts this year, “proving “the first real challenge to equity markets in nearly six months”, they say.

The strategists now see a higher risk that the Fed will turn more hawkish — i.e. tighter rather than looser policy — with front-end Treasury yields clearly on the rise. The current episode is also being considered more of a “policy shock,” than it has up to this point, say Wilson and Trivedi.

With the market more worried about inflation and any “policy shock,” the path to relief would require improvements on monetary policy outlook and resolutions over geopolitical issues, they say.

A “good opportunity” to press the bullish case for stocks will come once a reset in interest rate pricing has been completed, especially if the Fed hangs onto its easing bias.

“But the immediate catalysts for that shift are less clear and it is harder than before to manage a long position through options. Without a bigger discount, we think there may be further choppiness ahead,” said the pair.

As for where to invest, Goldman offers this advice: “A higher chance that monetary easing comes later and slower is likely to favor the high-quality parts of the market and weigh on small-caps, while the greater prospect of rate cuts outside the U.S .means that non-U.S .equity markets (FX-hedged) may face a friendlier growth/inflation mix in the near term.”

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