Goldman Sachs, BlackRock warn investors on recession risk

The markets are yet to price in the risk of a global recession, according to a report by Bloomberg-Goldman Sachs Group Inc. and BlackRock Inc.

Over the next three months, Goldman strategists have cut equities to underweight in the US investment bank's global allocation while staying overweight cash. BlackRock advises investors to not invest in most stocks, as they say it is tactically underweight developed-market shares and prefers credit in the short term.

Goldman strategists including Christian Mueller-Glissmann wrote a note Monday that current levels of equity valuations may not fully reflect related risks and may have to decline further to reach a market trough. Goldman s market-implied recession probability has risen to over 40% after the recent bond sell-off, which historically has indicated elevated equity drawdown risk, they wrote.

Morgan Stanley and JPMorgan Asset Management expressed concerns about the resolve of central bankers to fight inflation, sending global stocks into a free fall over the past few days, echoed by Morgan Stanley and JPMorgan Asset Management. Even as the MSCI World Index's members have lost more than $8 trillion since a mid-September peak, there is little respite in sight, even though the MSCI World Index's members have lost more than $8 trillion in value since a mid-September peak due to a surge in US yields and the dollar.

READ: Throw-in-Towel Moment Is Yet To Come Even After Stock Selloff

In a note Monday, BlackRock Investment Institute strategists, including Jean Boivin and Wei Li, wrote that they don't see a soft landing whereinflation returns to target quickly without crushing activity. That means more volatility and pressure on risk assets. As stock market volatility continues to rise, JPMorgan Asset is sticking to its underweight on equities heading into the fourth quarter. Sylvia Sheng, global multi-asset strategist, wrote Tuesday that the firm strongly favors investment-grade credit over high yields, because of the sluggish growth in the US and the recession in Europe over the next 12 months.

A global recession probability model by Ned Davis Research recently rose above 98%, triggering a severe recession signal. The firm said that the firm's only previous acute downturns, such as in 2020 and 2008 -- 2009, were the only times it's been that high.

The days of the TINA - There is No Alternative mantra for stocks are over, according to the Goldman strategists. They wrote that while falling yields had burnished the appeal of equities since the global financial crisis, investors are now facing TARA There Are Reasonable Alternatives with bonds appearing more attractive.

Goldman's bearish take came after its US strategists slashed their year-end target for the S&P 500 Index to 3,600 from 4,300 last week. Europe strategists including Sharon Bell have reduced their target for regional equity gauges, downgrading their 2023 earnings-per-share growth forecast for the Stoxx Europe 600 Index to 10% from zero.

The S&P 500 and Stoxx Europe 600 ended Monday at their lowest levels since December 2020.

The bear market has not yet reached a trough, Bell and her colleagues wrote in a note Monday about European stocks.

None of This Is What Life's Like in the World's Strictest City of Covid Zero City