Goldman Sachs Group Inc. strategists expect stock returns to remain mostly “fat and flat” over the next year, capped by higher-for-longer interest rates and frothy valuations.

The equity gains seen this year are in line with the late-cycle “optimism” phase that started at the end of 2022, according to Goldman, with multiples rising despite central-bank tightening and tech shares getting a boost from artificial-intelligence hype.

“Despite these improvements, we think the absolute upside for equity markets is constrained by both high valuations and the prospects for interest rates to remain higher for longer than the market has been pricing,” Goldman strategists led by Peter Oppenheimer said in a note.

In the current cycle, the growth phase has been characterized by relatively low returns in a wide trading range, they wrote.

With the S&P 500 Index trading at about 20% above its 20-year average, valuations have de-coupled from rising rates and bond yields. According to Goldman, this means that investors either expect quick rate cuts or their long-term growth expectations have increased, or both.

The strategists said that in the absence of a recession, central banks won’t be in a rush to reduce rates, and they expect virtually no profit growth this year and mid-single digit expansion in 2024.

Goldman’s team continues to favor a barbell approach of combining quality growth, strong balance sheet and high-margin businesses, with some “deep value” where valuation risks are skewed to the upside.

Looking at options, the put-call skew in stocks signals that upside positioning is now crowded, while downside protection is attractively priced, the strategists wrote. 

This article was provided by Bloomberg News.