Market Factors: Goldman sees plenty of risk, but no bear market

In today’s newsletter, you’ll learn why a Goldman Sachs’ chief global strategist is recommending reducing portfolio risk. Later, a Rabobank analyst details some confusion surrounding DeepSeek and we’ll take a look at the latest advances in supersonic air travel.

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Equities

Goldman Sachs sees a lot of risk but no bear market

A research report from Goldman Sachs chief global equity strategist Peter Oppenheimer assuaged investor fears that this week’s volatility signaled a bear market – but then gave clients a bunch of reasons to worry.

We’ll start with the good news. The strategist first argued that the greater than 3.5 per cent drop for the Magnificent Seven stocks on Monday was merely a correction, and does not represent a longer-term peak for the S&P 500. Bear markets have historically resulted from recession fears that reduce profit expectations. Goldman Sachs, however, sees only a 15 per cent chance of recession and also believes the Federal Reserve will cut rates, which will support risk assets.

The report made a quick turn to pessimism after that. Mr. Oppenheimer noted that U.S. equities are priced for perfection and highly sensitive to any bad news. Valuations are high relative to history, even if large-cap technology stocks are excluded. (Elsewhere on Wall Street today, Citi strategist Scott Chronert noted that the PE to growth ratio for the Magnificent Seven is actually lower than that for the non-Magnificent of the 493 stocks in the S&P 500, a finding that took me aback).

Global markets are concentrated in three major ways: U.S. stocks have come to dominate global equity indices, technology as a sector is dominating benchmarks, and there is also a portfolio trend towards large positions in a few single stocks. All this makes the rally more fragile.

The strategist is clear that technology dominance arises from superior performance, not pure speculation, but concentration is still a concern for investors.

As for the AI investment theme specifically, Mr. Oppenheimer raised concerns about whether the companies investing the most currently will be the primary beneficiaries when usable AI technologies permeate the global economy. He raised the disquieting potential parallel to the telecom buildout in the late 1990s. The telcos that built the internet’s infrastructure did not reap the bulk of the profits and stock prices suffered considerably.

Mr. Oppenheimer recommends portfolio risk reduction through diversification. That means an overweight position in bonds, exposure to the equal weighted S&P 500 to guard against a tech wreck, and holding more non-U.S., non-tech stocks with consistent earnings growth.

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AI

It’s not entirely clear DeepSeek is playing fair

Rabobank senior macro strategist Benjamin Picton jokingly renamed DeepSeek as ChatCCP, which I applaud. His report also provided a solid guide to what’s next after the Chinese AI Sputnik roiled markets.

Mr. Picton first noted the serious threat DeekSeek represents for the AI-related U.S. tech giants like Nvidia Corp., Meta Platforms Inc. and Microsoft Corp. DeepSeek’s claim, that its open source app was trained for less than US$10-million when current developed world training takes literally billions of dollars in data centre development, means the company had easily stepped over the competitive moat the U.S. companies believed they had.

DeepSeek’s contention of cheap training are dubious according to the strategist. He writes, “it is very likely that DeepSeek has in fact relied on U.S. chips that it wasn’t supposed to have and may not be able to access in the future.” He also noted that because the software is open source, the code is being studied right now and the ability of developers to replicate DeepSeek’s results at the same bargain price will be important to tech stock performance in the weeks ahead.

Diversions

Supersonic travel for everyone

At some time during the 1960s the romance of air travel peaked and began a steady decline to the point where the airlines are viewed as just Greyhound buses in the sky, but with far more logistical hassles before getting on. It hasn’t helped that, the inefficient Concorde aside, passenger planes look largely the same as they did 50 years ago. They don’t go much faster either – most of the new technology is focused on efficiency and automation.

A company named Boom Supersonic is trying to alleviate this tedium. The company successfully tested its XB-1 aircraft recently and became the first private entity to fly a plane faster than the speed of sound. The XB-1 is a prototype for a cool looking passenger plane called Overture they are developing that will offer supersonic travel. Importantly, Boom Supersonic is testing technology that will minimize the sonic boom that disrupts activity on the ground and limits the airtime at faster than sound travel.

The essentials

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The Rundown

Reuters reports on why an AI stock shock could spark broader gains in U.S. market

Former portfolio manager Tom Czitron points out that this is a good time to rebalance portfolios given that big returns are unlikely to be repeated this year

Global investors now see China as a market for smaller bets with quicker payoffs

Arjun Deiva used FactSet data to go hunting for ten Canadian dividend stocks to weather market turbulence

What’s up next

The Bank of Canada cut rates by 25 basis points to 3.00 per cent Wednesday morning as expected. The only domestic economic release of wide interest to come this week is month-over-month GDP for November on Friday, which is expected to show a 0.1 decline.

TSX earnings season is heating up, with CGI Inc. ($1.973 per share expected) and Canadian Pacific Kansas City ($1.236) reporting Wednesday and Rogers Communications Inc. ($1.358) and Canadian National Railway Co. ($1.938) Thursday. Imperial Oil Ltd. ($2.115) releases results Friday ($2.115) and Suncor Energy Inc. ($1.155) is up next Wednesday.

In the U.S., where the Federal Reserve opted Wednesday to leave interest rates unchanged, annualized GDP for the fourth quarter is out Thursday, with 2.7 per cent growth forecast.

The Fed’s favourite inflation gauge, the PCE Price index, will be reported Friday and a month-over-month increase of 0.3 for December is expected. The ISM manufacturing survey for January comes out Monday with a still-contractionary 48.9 reading expected.

The S&P 500 earnings calendar is busy, beginning with Tesla Inc. (US$0.752 per share expected), and Meta Platforms Inc. ($6.784) on Wednesday followed by Quest Diagnostics Inc. ($2.184), Mastercard Inc. ($3.692) and Apple Inc. ($2.350) on Thursday. Exxon Mobil Corp. ($1.562) and Colgate-Palmolive Co. ($0.889) report Friday. Alphabet Inc. ($2.127) is up Tuesday and QUALCOMM ($2.965) releases results next Wednesday.

See our full economic and earnings calendar here (You can bookmark the page – it gets updated weekly)