Peter Oppenheimer from Goldman Sachs has written about the current rally in US stocks, which follows a period when they were underperformers.

According to the strategist, this rebound is much more rational than what it may seem at first. He added that some investors seem to have missed this rally which leaves them somewhat confused.

Oppenheimer lists 7 factors that have led stocks to trade higher over the past few days.

1. Real interest rates are still very negative, and equities offer a real return.
2. As they claim the nominal GDP of the country, equity is a true asset.
3. The balance sheets of the private sector are robust.
4. The credit markets are relatively stable.
5. Increased fiscal spending/CAPEX
6. The long-run average value of valuations has fallen below the low end;
7. The amount of position was greatly reduced which has increased the risk asset asymmetry.

However, the strategist believes that equities have little to no upside given that the GS year-end price goal for the stock is currently 4700.

Oppenheimer stated in a client letter that while equities can provide an inflation hedge over the medium-term and outperform bonds but there are still risks to their downside and greater volatility related to growth risk.

He continues to see a fat & flat market where returns are lower than in the post-financial crisis era. Goldman Sachs projects a 25%-30% chance of US recession over the following year.

The short-term Q2 macro data will and the forthcoming earning season are important data points. Under a recession scenario, the S&P 500 could fall to 3,600, or 22% below today’s level. In conversations with clients, there is a noticeable lack of excitement or conviction about US stocks at current valuation levels. The P/E for 2022 was 21x the $221 EPS forecast. This is due in part to the weakening economy and growing rates. The strategist said that there would be more risks in other markets.

By Senad Karaahmetovic