The stock market is going nowhere as investors opt for risk-free returns

• According to Goldman Sachs, the stock market is going nowhere as investors adjust to high stock valuations.
• The bank said a range-bound stock market is likely with risk-free assets yielding more than 5%.
• Investors are flocking to money market funds, with the category seeing $117 billion in inflows this week.

Stock market investors hoping for a rally will have to be patient if Goldman Sachs’ forecast proves correct.

The bank said it expects the S&P 500 to trade in a sideways range that delivers only flat returns as investors grapple with unattractive valuations and juicy alternatives in the form of risk-free bonds and money market funds, according to a Friday note.

“We see two potential problems,” wrote Peter Oppenheimer of Goldman Sachs. “The first is that the US stock market, long a significant outperformer, remains expensive relative to history and relative to real interest rates.”

The second problem is the fact that investors can choose a guaranteed, risk-free return of about 5% in the form of short-term Treasury bills and money market funds. That means there’s a high hurdle that stocks have to overcome to be attractive enough for investors to consider, and a US banking crisis certainly isn’t helping.

So far, it’s the risk-free cash assets that are winning, with cash flow data showing that money market funds attracted $117 billion in inflows last week, according to Bank of America data. That’s the biggest week of inflows since 2020, when investors flocked to safety amid the outbreak of the COVID-19 pandemic.

“Cash rates are rising and, without risk and volatility, cash and short-term debt look very attractive relative to equities. This is especially true given that yields on US 10-year bonds are well above dividend yields,” wrote Oppenheimer.

The S&P 500 currently has a dividend yield of about 1.60%, less than half of the US 10-year yield of 3.45%.

And the stock market’s risk-return profile isn’t likely to improve anytime soon, as Goldman expects flat earnings growth this year and only 5% earnings growth in 2024, meaning valuations are likely to remain high unless a significant sell-off occurs.

“If, as we expect, global economies avoid recessions this year and inflation continues to moderate, the fundamentals for equities should look more attractive to long-term investors. But valuations are not yet compelling enough to offer particularly high risk/reward. expectations for modest earnings growth in the short term,” concludes Oppenheimer.