Goldman Forecasts Stocks Will Remain 'Fat And Flat' - And Reveals How To Make Money Off Of Them

It is thought that Swiss authorities interceded over the weekend to broker a deal between UBS and Credit Suisse, thereby averting what could have been a global banking crisis.

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In spite of this, Goldman Sachs' Chief Global Equity Strategist Peter Oppenheimer warns that stock markets are still not out of the woods yet. According to him, contagion fears involving the banking sector are not the only risks affecting stocks; he predicts that the market in the near term will remain "fat and flat" due to contagion fears.

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The Oppenheimer analysts wrote in a note released on Mar. 17 in advance of the announcement of the Credit Suisse rescue deal that the markets would continue to be 'fat and flat' even if markets reacted in the short term. Since valuations are not particularly attractive at the moment, Oppenheimer has predicted that high uncertainty and low confidence levels will remain.   

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First, the reason for the valuation problem is that the U.S. equity market, which has been a strong outperformer for decades, remains overpriced when compared to its historical background and when compared with its real rate. According to him, other markets are unlikely to de-couple in response to any correction led by the United States. Despite lower valuations outside of the U.S., which has contributed to recent outperformance.

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According to Oppenheimer, the second reason for stock prices' current difficulty has been that other assets appear to be more appealing, which is why there is a much higher hurdle for them to overcome. U.S. stocks still appear stretched and offer "very little return" in comparison to long-term debt, and he said cash and short-term debt look "very attractive" in comparison to stocks.

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Oppenheimer believes there is little chance for equities to gain any significant boost from a cut in interest rates that will be announced on Tuesday at the Federal Open Market Committee meeting.

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According to him, U.S. stocks showed almost no significant increase in price after the first rate cut, but they produced about twice their usual returns three months later.

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According to his analysis, the returns after a 12-month period following a rate cut tend to be positive, but below average. This is large because economic growth has been weaker because of the rate cut. Equity markets usually do better when rates are rising," said the economist.

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It is possible to trade it if you know how to do it

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According to Oppenheimer, there will continue to be outperformance by European stocks when it comes to stocks in the U.S. despite uncertainties in the European banking sector.

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According to him, European financial markets have outperformed the rest of the world as a result of improved relative fundamentals, positive inflows, and reduced valuations.

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"At this time, we still like companies that have solid balance sheets and stable margins. The Healthcare sector in both the US and Europe is one that we are overweighted among the more defensive components of the markets. In addition to dividends and buybacks, Oppenheimer said income strategies will also be of primary importance.

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In addition to stocks, he looks at cash as a growing asset class in his global asset allocation, as a result of greater uncertainty regarding corporate profits' near-term path given the troubled economic conditions.