Goldman Sachs Chief Global Equity Strategist Peter Oppenheimer Talks
09:48 Share

With Amex Business Platinum, your dental clinic can really sparkle. With a flexible spending limit that adapts with your business, that's the powerful backing of American Express. Not all purchases will be approved. Terms apply. Learn more at americanexpress.com slash amexbusiness.

Bloomberg Audio Studios. Podcasts, radio, news. We begin this hour with stocks pushing higher, looking to snap a three-day losing streak as countries rush to the negotiating table. Peter Oppenheimer of Goldman Sachs writing, we would argue that we are in an event-driven bear market triggered by tariffs. However, it could easily morph into a cyclical bear market given growing recession risk. Peter joins us now for more. Peter, welcome to the program, sir. It's good to see you. What's the difference between the two? Why is that distinction so important this morning?

Well, actually, the distinction is not that much when you look at the typical falls that you tend to get. In both cases, the falls on average in equities are roughly about 30%. There's a reasonable distribution around that. That's the average. But mainly, they're distinguished by how long it takes for the market to fall.

and then recover. And in what we call event-driven bear markets, that process is a lot faster. What's the difference between the two? Well, event-driven bear markets, as we call them, is something that's sort of triggered by an exogenous shock, an event like tariffs, that really just forces the economy off its previous track

Whereas a cyclical one, the most common type of bear market we see in equities is really about recessions. So the critical thing from here really is to what extent investors really start to fully price a recession, which would imply profits fall

and equity valuations have further to decline. Peter, I guess we're trying to figure out how much the damage is being done by just simply uncertainty and how much the damage is being done by actual profit margin contraction, by consumers facing off higher prices. Which is the bigger impetus for some sort of recession at this point in your mind?

Well, I think one of the triggers here, as you say, is uncertainty. In the end, uncertainty is the enemy of activity and of risk assets, because what tends to happen is that both investors and companies, as well as consumers, tend to just hold back.

decisions are pulled and that results in slowing activity. But obviously as economies slow, then you tend to get other sort of factors that come into play. Now the good thing, I would say, is that there are some important underlying supports of economic activity. Private sector balance sheets generally are quite strong, both corporates and banks. Of course there's also room generally for central banks to be cutting interest rates.

which will be helpful in time and is usually one of the necessary conditions before equities really recover from a bear phase. But I think at the moment this is really about uncertainty and about investors trying to calibrate how far economies slow and for how long.

Yesterday's price action was interesting to me, Peter, because it highlighted the fragility of the liquidity in the market on all sides. Just this idea that why would anyone have conviction to buy right now when you could be blown out of the water by just simply a headline that is unsourced, that comes out and then gets reversed 15 minutes later. How much is that kind of volatility, if it persists, enough for you to actually lower your forecast yet again for the S&P?

Well, I think the critical issue here, again, comes back to whether there's likely to be a recession or not. Our economists believe that the probability of a recession in the U.S., for example, over the next 12 months is now around 45%. But indeed, if the four expected tariffs come through and there is no pullback,

that would likely trigger a recession. And look, in a recession, typically profits do fall anywhere from sort of 10 to 20% or more, depending on what industries they're in and in what regions. And of course, if investors start to price that as a likely outcome, the most likely outcome, then equity indexes have further to decline as they price in lower profits and probably a lower valuation as well.

So, you know, we still have downside in the short run in our targets. But I think also the sort of conditions you're likely to see to really sustain a base in equity markets for a proper recovery are not really yet there, I would say. Peter, at the beginning of this year, there was this idea that if the U.S. didn't enact tariffs, you would end up seeing the pain more greatly around the world.

particularly in Europe, maybe even in China. That has been shifted, although now we seem to be heading back to that kind of idea. Where do you stand on this? Do you think that the U.S. is the epicenter of pain or simply a part of a global trend that is not going to leave really any bright spots? Yeah, I think it's interesting the point that you raise there. I mean, certainly when we surveyed investors early this year,

asking them about what they thought the impact of US policies would be. It was very much a focus on being negative for the rest of the world, particularly Europe and China, as people focused on the impact of tariffs, but would be really quite positive for the US because people had in mind the potential for tax cuts and for deregulation.

And while that potential still exists, what's happened, I think, in the U.S. is that the focus has very much shifted towards the impact of tariffs in the U.S., both in terms of higher inflation and investment and growth uncertainty. So it's really now become a sort of global issue, engulfing the world in this uncertainty and therefore raising the risks of an economic downturn.

shock that hits profitability and profit margins more broadly. And so, yeah. Well, we heard from the Treasury Secretary yesterday who talked about how the president gave himself maximum negotiating leverage. And now Bessent with Jameson Graham will be leading these negotiations, starting with Japan. Does that give you some sense of optimism? Can you put this genie back in the bottle?

Well, look, anything is possible. We know that the tariffs are about to be enacted, but of course there is room, I think, for negotiation and that's the signals that have come out of the administration. But again, negotiations can take a long time and can be quite complex and that's going to create an environment of uncertainty, at least for a period of time.

But also, I think it does demonstrate that we're in a change sort of global environment in terms of the world trade architecture. And this was already...

beginning to shift in the months that followed the pandemic as companies around the world tried to diversify supply chains. So we're in a less globalized environment. That's going to put some down with pressure on world trade.

and of course has implications both for inflation and growth. But I think it is of course possible that this is part of a tactic to negotiate and come to agreements, but we've got some time yet of uncertainty. Bear in mind also that we came into this year with relatively high valuations in risk assets, both in equities and credit,

they were not pricing much downside risk at all. We're still in the process of that adjustment coming through. Talking about valuations and that's really where I wanted to end was this idea of large cap tech stocks that seem to lead the way. And there was sort of a hint that maybe they could lead on the way up yesterday. But some of the damage has been pretty impressive. I mean Apple

for example, has lost almost $640 billion of market capitalization since the end of the day on April 2nd. That's about 19% of its value. Do you see big cap tech leading again global stocks given the fact that we are seemingly in a new world order?

Yeah, I think it's an interesting point. When we came into this year, our strategy was very much about diversification, both geographically, given the huge dominance that the U.S. market had sustained up until that point, but also across sectors and factors. And we really emphasized the risk in a sense that the U.S. market had become so dominated

and concentrated in a small number of super large tech companies. Of course, what we've seen since the beginning of this year, aside from the slowdown in growth expectations, is that some of the big tech stocks have been hit as you see new competition emerge, particularly from China.

But to be clear, these companies are very profitable, they have very strong balance sheets, they're very cash generative, and in that sense pretty defensive. And we've also done some work comparing the technology ascent that we've seen in recent years to the period of the tech bubble.

quarter of a century ago and there are some major differences particularly in terms of valuation. These large companies are nowhere near the sort of bubble type valuations that we saw a quarter of a century ago around the internet or indeed in other bubble periods in history like Japan in the late 1980s. So I think that

the tech sector is still going to be a very important cornerstone of the recovery in equity markets as it comes through. And many of the biggest companies are relatively defensive in terms of their balance sheets. And that's an important factor, I think, to bear in mind.

Hey, Pete, good to get your thoughts this morning. Peter Oppenheimer there. Thanks. I've got my thanks. Thank you, sir.