Source: Arab Trader Wednesday 29/1/2024
According to Peter Oppenheimer, chief global equity strategist at Goldman Sachs, the recent stock market downturn, sparked by news of the DeepSeek AI model, is a correction rather than the beginning of a sustained bear market.
The sell-off marks the first drop of more than 3.5% from the impressive seven since last fall. Oppenheimer explains that most bear markets typically stem from fears of falling corporate profits and economic recession, but this is not the case now.
“Our economists remain confident in global growth and remain above consensus on their forecast for the United States, putting the probability of a recession in the next 12 months at 15 percent,” he wrote.
Goldman Sachs (NYSE:GS) also expects interest rate cuts this year, albeit modest, and further progress in moderating inflation. The entry of a low-cost competitor into AI could reinforce these trends, supporting riskier assets.
Oppenheimer noted that “yields in equity markets, led by the US, have been unusually strong over the past two years, especially since October 2023.” In addition, valuation levels – especially in the United States – have risen to high levels.
The strategist added, “While the biggest tech companies reflect much of this, the stock market remains expensive compared to history, even when excluding technology with significant market capitalization.”
Despite these risks, Oppenheimer dismisses the idea of a large-scale market bubble. The growing dominance of US stocks, the technology sector’s market leadership, and the concentration in a few large stocks are all rooted in fundamentals rather than speculation.
However, DeepSeek’s entry into AI has led to competitive pricing pressures at a time when core AI models have reached a level that is “good enough for many enterprise use cases,” Oppenheimer said, citing technology analysts at Goldman.
He added that this was a wake-up call for concentration risk in the markets, as stock prices “are usually not driven by absolute results, but by results relative to expectations.” Goldman Sachs recommends maintaining equity exposure but diversifying to improve risk-adjusted returns. He sees opportunities in equiweighted indices and non-technology growth stocks, while also recommending broader geographical exposure. In short, the bank does not see a major shift in the market away from the winning stocks of the past, but rather a gradual expansion in market leadership. “We reiterate our view that this is not a bear market and there are still attractive opportunities within the United States as well as in technology.”
