Introducing the ‘Maleficent 7’

The first quarter isn’t over yet and Goldman Sachs has already thrown in the towel on its year-end call for US stocks.

Wall Street forecasts targets are almost never useful, to be clear. But it’s pretty early in the year to be retreating, and renaming the “Magnificent 7” — the cohort of megacap tech stocks that still comprise an absolute ton of the US market — the “Maleficent 7”.

But a stock market correction sparked by an aggressive trade war against the US’s three biggest trading partners will do that! Or should do that. February consumer confidence posted its biggest one-month drop since the pandemic era, egg prices aren’t going down any time soon and markets seem bearish on Americans’ desire to spend.

Goldman’s chief equity strategist David Kostin isn’t exactly bearish now, but he did cut his target. In other words, he thinks the S&P 500 will rise ~10 per cent from current levels (to 6200), rather than ~10 per cent from end-2024 levels (to 6500).

He points out that the formerly Magnificent 7 are responsible for “more than half” of the correction. This is interesting, but not the full story, as we can see:

It’s Tesla. Sure, Mag 7 stocks are down, but Tesla is super down, as Bryce has covered.

This market mess has helped fuel broader fears of recession. GS isn’t willing to stick their neck out (maybe figuratively, though who knows) to predict a downturn, insisting it’s not their “base case”.

Instead, they blame the stock market correction on “uncertainty” about growth and an unwinding of hedge fund positions. The bank does hedge its own bets, however:

The headwinds to equity valuations from a spike in uncertainty are typically relatively short lived. However, an outlook for slower growth suggests lower valuations on a more sustained basis. Uncertainty should eventually retreat and positioning should stabilize in the near future, likely partially reversing some of the recent expansion in the equity risk premium. However, our revised economic and earnings growth forecasts suggest the S&P 500 will continue to trade at a lower multiple than we previously expected. Our S&P 500 valuation model incorporates a variety of metrics reflecting the macroeconomic backdrop and corporate fundamentals, including the health of the labor market and consensus expectations for S&P 500 EPS growth.

And they do highlight some “stable growth” stocks for those investors who think US Treasury Secretary Scott Bessent actually meant “recession” when he said the US economy will need a “detox period”. (They include Comcast, Waste Management, PepsiCo, and other staples-type stocks.)

Rates markets also seem wary about recession, if not fully committed to the narrative. They’re pricing in three to four 25bp cuts this year.

So what can turn it around?

We believe investors will require either a catalyst that improves the economic growth outlook or clear asymmetry to the upside before they try to “catch the falling knife” and reverse the recent market momentum.

Either stocks need to get cheaper or growth needs to look better. (Or tariffs need to go away.) Have fun!