Risk-on rally is ‘likely overdone’, tech stocks are still expensive

By Senad Karaahmetovic

Goldman Sachs strategists believe the risk-on rally is “likely overdone” after the rallied about 15% off its recent lows.

The rally in risky assets was fueled by a softer-than-expected print on Thursday while the and rates fell sharply. The strategists remind clients that sharp bear market rallies are not uncommon while extremely bearish positioning “has likely exacerbated some of the moves.”

“The relief in the equity market is consistent with equities being very negatively correlated with bond yields, both real and nominal, YTD and likely reflects the markets’ hopes for a true peak in inflation and hawkishness which would tend to support risky assets provided growth remains good,” they said in a client note.

While falling inflation is supportive of “a peak rates volatility narrative,” the strategists believe the risk-on rally is now overdone with the S&P 500 trading close to 4000.

“The larger than expected inflation reset might support a slowdown in the hiking pace but risks of a hike cycle extension remain. Additionally, the significant ease in financial conditions might force central banks to reiterate their hawkish stance, especially if growth continues to be resilient – activity data are yet to show signs of material weakness,” the strategists added.

Instead of chasing a rally in tech stocks, which continue “to look expensive given the level of rates,” Goldman Sachs strategies see investment opportunities in China where investors are actively anticipating the re-opening.