Goldman Sachs Survey: More Than Half Our Clients Expect Negative Returns for Global Equities This Year

The S&P 500-stock index is down 9 percent since the start of the year on concerns ranging from negative interest rates to a hard landing in China. A new survey from Goldman Sachs Group Inc. shows that a growing proportion of its clients are worried about a global recession.

"More than one third of the clients attending our recent macro conference in Hong Kong expect cash will post the highest risk-adjusted return of any asset class in 2016. Nearly 60 percent of the participants forecast global equities will deliver a negative return this year."

Kostin and team don’t discredit the heightened concerns, but they do point out that consumers are still sending a number of strong signals that point towards a continued expansion.

The team said that the strength of the consumer should not be overlooked. "Many investors believe the economy is on the precipice of a recession. However, quantitative and qualitative measures of consumer activity suggest spending will continue and the economic expansion will persist."

So unless the consumer starts exercising more caution and spending decelerates, Goldman remains bullish on the global economy. The most recent retail sales numbers were relatively strong across the board, increasing for a third straight month in January, with 8 of 13 major categories showing increases in demand from the prior month.

It's worth noting that Goldman started the year with one of the lowest 12-month targets for the S&P 500, at 2100, but with a number of other firms lowering targets, Goldman is now near the front of the pack. Stocks would have to rise 13 percent to reach that target.

Smashed Valuations Show S&P 500 Used to Profit Recession

The simplest way of explaining the selloff that has driven U.S. stocks closer to a bear market than any time in five years is that investors are adjusting to a new earnings reality. Based on share valuations, that reality is pretty bleak.

While equity analysts continue to predict a rebound in Standard & Poor’s 500 Index profit this year, stocks are no longer buying it. Evidence can be seen by plotting the forward price-earnings ratio against its historical average, a comparison that could be read as suggesting investors don’t see profits rising anytime soon.

The S&P 500 has a forward 12-month P/E ratio of 15.2 times, the lowest in two years and down 13 percent from 17.4 at the start of 2016, according to Bloomberg data.

One way to get the multiple back to its historical average of 16.6 would be for corporate profits to fall this year. Currently, analyst estimates compiled by Bloomberg call for a 4 percent increase. The index climbed 2 percent at 4 p.m. New York time.

Contracting valuations haven’t gone unnoticed in official circles. The Federal Reserve said in its semi-annual monetary report on Wednesday that the drubbing in stocks has pushed P/E forecasts back in line with historical levels.

As equity investors grapple with threats ranging from slowing global growth to a strong dollar, their solution has been simple: sell stocks pending signs of a recovery.

They’ve done it for five days in a row, extending losses since last May’s high to 14 percent. S&P 500 companies are in the process of reporting their third consecutive quarter of earnings declines and are expected to see profits fall through June, analyst estimates show.

Among S&P 500 members, combined quarterly income growth has turned negative in 33 instances since 1937, data compiled by Bloomberg and S&P Dow Jones Indices show.

While half of those episodes lasted no more than six months, the others almost always dragged on, spanning five quarters on average. Out of the 17 occasions where earnings fell for at least three quarters, 14 occurred within three months of a bear market.