Analysts from Goldman Sachs believe that a 10 percent drop in the asset class could happen in the coming months.
Stocks are in a sort of wide but volatile trading range with relatively low returns. Goldman adds that stocks are at the high end of that trading range and moving towards the lower end is quite likely given the recent rally. The bank downgraded stocks to "underweight" on Monday as part of its three-month asset allocation. Although it remains "neutral" on equities over a 12-month period and continues its "overweight" position in cash.
The downgrade came after a rally in risk assets over the past few weeks driven by the U.K.'s vote to leave the European Union on June 23 and the search for yield amid expectations of further monetary easing and stimulus measures. Goldman suggested that with equities looking expensive and with weaker-than-expected earnings growth it was the right time to downgrade.
Chief global equities strategist at Goldam Sachs, Peter Oppenheimer ads that there has to be a limit to how far the market can rise from a valuation perspective with weak growth. On the other hand, there's a limit to how much equities can fall as you continue to see yet lower bond yields and more support, or potential for more support from quantitative easing.
Market participants have taken a pause for breath in recent trading sessions after the rally. The Dow Jones has been on a losing streak and sentiment in Europe has been hit by volatile banking stocks.
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