Goldman: “We see three main areas of risk” for the market

As the markets continue to struggle — though we’re still just 3% below the all-time closing high for the S&P 500 — it’s always worth stepping back to assess the major sticking points for stocks at the moment.

Goldman Sachs’ London-based team of global market analysts tucked a nice succinct chunk of that sort of perspective into the weekly note they published early Monday, saying they “see three main areas of risk.”

The first, they say, is to be found in the relationship between sky-high valuations — the S&P 500 forward price-to-earnings ratio is still just below 23x — in the context of an economy that may be slowing.

We say “may be” because we’ve been sort of flying blind for weeks, as the market’s regular data diet was disrupted due to the US government shutdown. Now that the shutdown is over, factual updates on the US economy will recommence over the next few days, with the US monthly jobs report for September due Thursday. If the fresh data starts to confirm slowdown fears, buckle up.

“Given high valuations in equity markets, any disappointment in economic growth is likely to lead to a sell-off,” Goldman analysts wrote.

The second key risk Goldman spotlighted hinges on AI and whether the surge in spending on data centers, especially by so-called hyperscalers like Meta, Amazon, Oracle, Microsoft, and Alphabet, will ultimately prove profitable.

That’s a big deal for the markets — Goldman notes that the five largest US tech firms make up 17% of total global stock market equity value. In other words, if they go down, the markets go down. And whether or not they go down depends largely on whether this massive AI bet will turn out profitably, the analysts wrote: “Any signs of revenue weakness, or declining returns on the back of higher capex spending, would likely drive a correction.”

The third potential trip wire for stocks, they said, can be found by tracking where these companies are increasingly planning to get the money to pay for big AI build-outs — that is, in the corporate bond market.

If yields — or the price of borrowing — in those markets start to climb, it could disrupt the positive picture market bulls have painted of the AI data center boom. That picture is currently one in which massive capex spending leads almost hydraulically to higher future profits and therefore higher stock prices.

But higher borrowing costs means the market would be forced to consider how the higher financial cost for data centers could compress those future profits, or potentially dissuade some build-outs altogether, which would then, in theory, weigh on the broader economy. Under such a scenario, there would be few places to shelter from the market storm, Goldman analysts said.

“Any signs of a broadening weakness in the private credit market, or funding for governments, could be the trigger for a renewed sell-off in sovereign yields and spreads,” Goldman analysts wrote, adding, “This could have the potential to push all asset classes down together.”

Read More: How speculative stocks lost one-third of their value in the past month