Equities are still the best game in town, despite this week’s market decline, according to Goldman Sachs Group Inc.
That’s because stock valuations are “nowhere near” where they were at the height of the dotcom bubble two decades ago, says Sharmin Mossavar-Rahmani, head of the bank’s investment strategy group. Unlike in the late-90s, the U.S. equity market today has broad-based returns and its corporate earnings are fundamentally strong, she said.
She said that holds true even after this week’s selloff.
“This kind of volatility is to be expected when you’re at these valuations,” Mossavar-Rahmani said in an interview. “The worst thing a client could do in terms of preserving wealth is to sell meaningfully in a downdraft.”
It’s an expanded version of a message that Goldman delivered earlier this month. That was before this week’s tech-led market selloff, but the bank’s investment strategy unit, which focuses on wealthy clients, hasn’t changed its view on the long-term prospects for U.S. equities.
Just five companies, including Apple Inc. and Amazon.com Inc., account for about a quarter of the market capitalization of the S&P 500, close to the highest level in 40 years.
Yet market concentration doesn’t necessarily indicate a bubble, according to the firm’s research. Unlike during the dotcom mania where the biggest companies were responsible for the lion’s share of the gains, the recent positive returns have been more widespread.
Then there’s the general mood of investors. The bank noted that sentiment-based indicators, like the American Association of Individual Investors Sentiment Survey, currently give “depressed” readings, in contrast to the exuberance typically displayed by traders in a market about to peak. Such bearishness has historically been followed by favorable equity returns.
“The hurdle to underweight U.S. equities should be high,” Mossavar-Rahmani said.
Others are less sanguine. Value manager Jeremy Grantham is calling the end of what he sees as a super bubble, and predicting a drop of almost 50% in the S&P 500. Analysts at Mizuho said earlier this month they expect equities to fall 10% to 15% by the second quarter, and end the year roughly flat.