Goldman strategists see plenty of reason to hedge the S&P 500 rally

(Bloomberg) — Investors should consider hedging the S&P 500 rally against recession-related risks, Goldman Sachs Group Inc. strategists say, citing several stock indicators.

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Bullish options positions look crowded, the rally has been narrow, valuations remain elevated, overly optimistic growth expectations are priced in and overall investor posture is no longer light, strategists such as Cormac Conners wrote. and David J Kostin in a note dated June 20.

“We prefer to maintain upside exposure to equities while using the options market to hedge the potential 23% decline in a recessionary scenario,” they wrote. There is a one in four chance of a recession in the next 12 months and if that prospect becomes more likely, the S&P 500 could drop to 3,400, they added.

Kostin, Goldman’s chief U.S. equity strategist, said in February that European and Asian stocks were more attractive to investors than U.S. stocks this year due to an expected decline in corporate earnings. This appeal has so far been unsuccessful.

The S&P 500 has outperformed benchmarks in Europe and Asia this year, entering a bull market in June, despite warnings of a recession set to hit next year. Bulls instead focused on a pause in interest rate hikes, while a frenzied buying in tech stocks linked to an expected boom in the use of artificial intelligence also took precedence over all expectations. macroeconomic concerns about the market.

Some of Wall Street’s key strategists, including Morgan Stanley’s Michael Wilson and JPMorgan Chase & Co.’s Marko Kolanovic, have remained wary for months of the ongoing rally.

Still, the Goldman team’s base case scenario is for the S&P 500 to rise to 4,500 by the end of this year, implying a gain of about 2.5% from now.

Investors should buy an S&P 500 put spread collar — an options strategy that involves buying a put down and selling a call up — to hedge a long equity portfolio, Goldman strategists wrote.

–With the help of Michael Msika.

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