Why Goldman is still very cautious on the stock market

The market's challenges may persist, prompting Goldman Sachs to stay cautious on recommending stocks even though they are at far cheaper levels than six months ago.

"Until the growth/inflation mix improves volatility is likely to linger as investors are shifting between inflation frustration and recession obsession," Goldman Sachs strategist Christian Mueller-Glissmann wrote in a new note to clients, adding that Goldman is positioned "defensively" for the next three months until macroeconomic conditions show signs of improving.

"Near-term equity drawdown risk remains elevated as equities are pricing only a mild recession: much of the valuation de-rating year to date has been due to higher rates/inflation," Mueller-Glissmann added. "Unless bond yields start to decline and buffer rising [Equity Risk Premiums] due to recession fears, equity valuations could decline further. In addition, earnings revisions are likely to turn negative in the second half."

Stock valuations may not yet be cheap enough, warns Goldman Sachs.
Stock valuations may not yet be cheap enough, warns Goldman Sachs.

Goldman's take on the market landscape comes on the heels of a brutal first half for investors (provided they weren't short stocks...) as interest rates rose and inflation stayed high.

The S&P 500 ended the first half of the year on Thursday down 20.6%, marking its worst start to a year since 1970. As for the Dow Jones Industrial Average its 15.3% drop in the first half was its worst showing since 1962. Meantime, the Nasdaq Composite's 29.5% first half plunge was its worst first half ever.

Almost no stocks were spared from the intense first half selling pressure.

Apple and Tesla are down 23% and 36%, respectively year to date. Netflix has fallen off a cliff with a 71% crash. A rare first-half winner: dividend payer IBM with a 5% gain.

"I think the bear market can't end until inflation shows consistent signs of moderating," Nuveen Chief Investment Officer Saira Malik said on Yahoo Finance Live.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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