Expect the stock market to remain “fat and flat” this year

Stocks are still in rally mode after the Nasdaq (^IXIC) Composite had its best first six months of the year in four decades, and the S&P 500 (^GSPC) gained 16% over the same period .

So where are stocks headed in the second half of 2023? Expect them to remain “fat and flat,” Goldman Sachs analysts say.

As the Federal Reserve raised interest rates in its fight against inflation, a big question for investors has been whether the central bank can achieve a soft landing or an economic slowdown without a recession in the United States. .

Strong economic data prompted economists on Wall Street to reconsider their expectations of a recession this year.

Goldman Sachs analysts wrote that “although a soft landing in the United States with inflation normalizing remains our economists’ base case, there are lingering risks.”

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., July 11, 2023. REUTERS/Brendan McDermid

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., July 11, 2023. REUTERS/Brendan McDermid

“As a result, we expect equities to remain locked in their ‘fat and flat’ range,” Goldman Sachs’ Christian Mueller-Glissmann and his team wrote in a Friday note to investors.

In June, economists at Goldman Sachs lowered their forecast for a US recession over the next 12 months to 25% from 35%. Still, Mueller-Glissman and his team warn that “inflation could prove stickier from here, triggering hawkish surprises from the central bank.”

The June inflation reading showed a 3% year-on-year increase in the consumer price index, its lowest annual increase since March 2021.

Cooling inflation and mixed economic data have economists wondering whether the central bank will indeed raise rates two more times this year. June’s 3% inflation is still above the Federal Reserve’s 2% target.

Goldman analysts also point to global growth data in China and Europe, which has been mixed.

“Data from China has disappointed significantly since the second quarter and in the eurozone, a weak global manufacturing sector has started to trickle down to services,” the note said. “One of the risks we see for 2H is that global PMIs could start to weigh on earnings revisions, especially as inflation normalizes at the same time.”

Meanwhile, Goldman notes that risk appetite for equities “increased significantly in June”.

Markets so far were backed by large-cap tech names like Nvidia (NVDA) which hit another all-time high on Friday.

Shares of Apple (AAPL) are up nearly 50% this year and Tesla (TSLA) has gained 127% over the same period.

While analysts initially warned of a weak rally this year, investors ventured into other names hitting 52-week highs. Even very short stocks are joining the rally.

Ines Ferre is senior economics reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre

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