MW Stocks have climbed out of a big hole. Here's what Goldman Sachs says investors should do next

By Jamie Chisholm

The S&P 500 closed Tuesday's session in positive territory for the year, having bounced back 18.1% from its low hit on April 8.

In a new note titled "What to do after the rally," Goldman Sachs global equity strategist Peter Oppenheimer posses the pertinent question for investors now that the swift gains from a relief rally already have been made.

The first thing investors must consider is what kind of bear market have we witnessed, or possibly are still in.

Oppenheimer says there are three kinds. The deepest and more prolonged is a structural one, preceded by asset bubbles and private-sector leverage, such as Japan's bubble of the late 1980s and the global financial crisis.

Cyclical bear markets are more frequent and often occur in advance of a recession, while event-driven ones can be triggered by shocks that hobble an economy.

Though there may have been some signs of late of a cyclical economic slowdown in the U.S., Oppenheimer notes that the main cause of the market's recent dive was the triggering event of President Donald Trump's April 2 tariff announcements, which many worried would cause a recession.

"We had feared that the recent drawdown would morph into a cyclical bear market as the tariff threats bore down on confidence and investment," says Oppenheimer. "The risk was that, irrespective of the eventual outcome, investors would apply a higher risk adjusted probability of recession, pushing the market lower on a combination of weaker earnings expectations and cheaper valuations."

That being the case, Goldman's strategists thought the rally up to the end of last week was a bear-market bounce, with a significant chance of a stock market relapse as economic data deteriorated.

However, Monday's announcement of a 90-day pause in the tariffs imposed on each other by the U.S. and China was a better outcome than investors had expected.

"This, coupled with the announced U.S.-U.K. trade deal, has been supportive for markets, which have increasingly implied that the drawdown has been event-driven and temporary, with little lasting damage. With the event itself now 'resolved', the market is pricing out recession risk and has recouped most of its losses," says Oppenheimer.

Consequently, Goldman has reduced the probability of a U.S. recession over the next 12 months from 45% to 35% and it's bumped up its year-end S&P 500 SPX target from 5,900 to 6,100.

So, what should investors do now? Well, according to Oppenheimer they should note that risks have not evaporated. Tariffs remain higher than before April 2, with an rate on U.S. goods imports of 13%, and economic growth will moderate. The Federal Reserve is likely to be less keen to cut interest rates.

"Also, while the equity market correction, which was unusually rapid, has been consistent with an 'event-driven' bear market, the average profile of these bear markets remains flat at best for some time after the initial fall. If this typical pattern is followed, the near-term upside is likely to be limited," says Oppenheimer.

It's also the case that the latest rally back close to record highs leaves many pockets of the market sporting high price-to-earnings valuations, Oppenheimer notes.

"Consequently, our asset allocation team has a neutral position on equities and remain overweight in cash," he adds.

Oppenheimer's strongest suggestion is for investors to diversify. One suggestion is away from the U.S., particularly as the dollar continues to weaken, which will also discourage foreign investors from buying American assets. The U.S. market's return on equity remains better than most competitors but its advantage has peaked. He notes the recent strong performance of German, Italian and Hong Kong stocks.

Diversification should also mean looking for more attractive sectors and investing factors. "Interestingly, while the focus on U.S. tech underperformance has been elevated this year, we were already seeing a shift in the opportunity set for investors towards a broader mix and combination of sectors, regions and styles than before the start of 2025," says Oppenheimer.

He suggests European banks as a good example of an underappreciated value sector.

Finally, Oppenheimer says investors should continue to focus on "quality growth companies that are reinvesting and can generate compound earnings over time and value companies that can compound returns through both share buybacks and dividend growth."

For example, tech performed badly during the recent sell-off but the first quarter results revealed the ongoing strength in the earnings of big tech companies, with little sign of a slowing in AI spending.

"We also think investors will reward stocks with high pricing power that can maintain margins in the face of elevated input costs. Despite the recent improvement in the growth outlook, tariff rates will likely be substantially higher in 2025 than they were in 2024, putting pressure on profit margins," he says.

-Jamie Chisholm

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May 14, 2025 05:14 ET (09:14 GMT)

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