Goldman Sachs gets bullish again on stocks
After warning on the risk of a temporary sell-off in stocks back in July, Goldman Sachs upgraded its outlook on equities to "overweight" on Monday, expecting a push higher for stocks in both the near- and medium-term.
"We upgrade equities to overweight over three months...we expect earnings growth, dividends, and high risk premia to support returns," Goldman's global investment team, which includes Peter Oppenheimer and Anders Nielsen, said in a research note released on Monday morning.
Back on July 25, the investment bank downgraded equities to "neutral" for the three months ahead, citing the risk of a temporary hit to stocks following a selloff in bonds. They said the near-term risk/reward profile for stocks was less attractive, despite iterating a "strong conviction" that stocks were the best-positioned asset class over the next year.
Read More Goldman Sachs downgrades equities to neutral
Over the ten days following that note, the pan-European Euro Stoxx 600 Index (^STOXX) fell 5 percent. But it is now 1 percent higher since that low. The S&P 500 (^GSPC) slipped 3.5 percent but has managed to log a gain of 1.5 percent from that date. With indexes now upright and pointing the right way, Goldman has decided to flip its view and says the new stimulus announced last week by the European Central Bank (ECB) was the reason behind this change.
"Following the dovish ECB decisions (on Thursday), we now see the risk to equities from higher bond yields as less imminent," the bank said in the note.
With Europe's central bank and President Mario Draghi delivering another rate cut and detailing a bond-buying program that some economists calculate will add 1 trillion euros ($1.29 trillion) into the euro zone economy, Goldman predicts that bond yields will likely rise at a slower rate. It also ignores the drag on equities that weaker growth and inflation from the euro area could bring, and says the "net effect" of ECB policy action from here will be positive for equity markets.
Read More Goldman Sachs: Get ready for only modest returns
S&P 2,050 target
Global equities - apart from those in Japan - will return 3.3 percent in the next three months and 12 percent over the next twelve months, it said. In July, it predicted a 1.8 percent return for equities on a three-month basis and 10.5 percent over the 12 months. It has also lowered its forecast for German 10-year sovereign bond yields from 1.60 percent to 1.30 percent by year-end.
David Kostin, the chief U.S. equity strategist at Goldman Sachs, meanwhile, gave the S&P 500 a 2,050 point year-end target, in a research note on Thursday.
Predictions by other global investment banks are in line with Goldman Sachs, although some have signaled a little more caution when investors add to their portfolios. Patrick Legland, the global head of research at Societe Generale wrote in a research note on Monday that risky assets should benefit from the ECB move in the short term but added that euro zone equities could suffer some volatility in the months ahead.
Read More Gartman warns on lack of conviction
Stephanie Flanders, chief market strategist for the U.K. and Europe at J.P. Morgan Asset Management also believes that European equities should benefit, though she added that earnings will need to show continued improvement if stocks were to keep rising.
Meanwhile, Dennis Gartman, the editor and publisher of the "The Gartman Letter," has also highlighted caution with his investing. He told CNBC on Friday that the weak momentum seen in equity markets was starting to trouble him as stocks markets failed to deliver a significant bounce after Draghi's announcement.
"(It) causes me a great deal of concern. I've been very bullish of stocks, perhaps it's time not to be quite so bullish," he said.
