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Stocks keep reaching record highs. Goldman Sachs is worried that leaves investors vulnerable to surprises.
The investment bank told clients this week that a near-term correction, in which the market slides at least 10% from a recent peak, "is looking much more probable."
The thinking: Equity markets look "increasingly exposed" to disappointing earnings growth due to the new coronavirus outbreak, Goldman warns.
Remember: The number of companies that have lowered their guidance on profits for the first quarter is still in line with past years. But Apple's surprise update this week that it wouldn't hit its revenue target has put investors on edge.
Goldman Sachs notes that the global economy is expected to keep growing, and the United States is, too, despite the country already having experienced its longest economic expansion in 150 years. That creates a supportive environment for stocks. But the bank is concerned that earnings expectations could still be too rosy, especially given the exposure of global companies to the Chinese economy.
Apple, it observes, has been "an important driver" of better-than-expected earnings results. Big Tech companies — Facebook, Amazon, Apple, Microsoft and Google — beat earnings expectations by 20% on average last quarter, compared with 4% for the average S&P 500 company.
"Any weakness to these and other companies would likely push earnings estimates lower," wrote Peter Oppenheimer, the firm's chief global equity strategist.
Additionally, depressed bond yields have made stocks look more attractive by comparison. Oppenheimer points to Germany's DAX, which has also hit an all-time high as the yield on the country's benchmark 10-year bond remains in negative territory. That raises the stakes for corporate earnings as well, he argues.
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