Volatility has continued with key price levels, earnings announcements, and an FOMC meeting driving markets. As of market close on January 31, the S&P 500 Index has now fallen -5.9% from its all-time high on January 3rd. Global equities have also turned lower amid risk-off sentiment. The 2-Year US Treasury yield has risen to 1.18%, 45 basis points (bps) higher than where it started the year, and the 10-Year Treasury yield is up 27 bps to 1.78%. We will provide additional perspective as market conditions develop.

1) To what degree have technical versus fundamental factors contributed to volatility?

• Recent market volatility was sparked by the release of the December FOMC meeting minutes and the broader hawkish shift by the Federal Reserve (Fed). Additionally, geopolitical tensions in Eastern Europe, sustained inflation, and mixed earnings have been sources of uncertainty.
• This initial market recalibration has since been exacerbated by technical factors. The S&P 500 and Nasdaq indices have broken below their 200-day moving averages for the first time since Q2 2020, triggering more algorithmic selling. Equity demand may also be limited because of earnings timing, which currently has ~90% of S&P 500 companies in a blackout period for share buybacks.
• Low levels of liquidity (Exhibit 1) have amplified price swings in both directions. Overall, technical factors have been significant to recent volatility. However, we still see fundamental support driven by above-trend GDP growth and easy financial conditions.

Source: Goldman Sachs Global Investment Research and Goldman Sachs Asset Management. As of January 26, 2022. “Top-of-book liquidity” refers to the liquidity of the highest bid and the lowest ask in an order book.

2) What is the impact of Q42021 earnings so far?

• This earnings season has been robust, tracking for 22% EPS growth in Q4. We believe any earnings-driven volatility reflects markets recalibrating towards normalizing but still solid earnings, following the steady positive revisions and EPS beats that raised sentiment in 2021. With about a third of the S&P 500 having reported Q4 earnings, we have seen 52% beats and 12% misses. While these earnings surprises have been weaker than in the rest of 2021, they are still stronger than the historical average.
• Looking ahead, more than 50% of S&P 500’s market cap reports earnings by next Friday, including members of the FAAMG complex. Additional disappointments in earnings or guidance may further weaken the market. However, earnings resilience may provide the catalyst for markets to start to move higher.
• We expect earnings to be the primary contributor to equity market returns this year. Goldman Sachs Global Investment Research estimates earnings growth to moderate to 8% in 2022 as the economy recovers but to still remain supportive of equities, making up ~80% of S&P 500’s forecasted total return this year.

3) How is the market reacting to the FOMC meeting?

• The January FOMC meeting left policy unchanged but prepared the market for March liftoff. The Fed also signaled that it may move faster than anticipated from its highly accommodative policy stance to address inflationary pressures.
• The market interpreted Chair Powell’s comments as more hawkish than expected, with market pricing considering a fifth rate hike in 2022 and 2-year yields rising 13 bps during and after his press conference (Exhibit 2).
• The Fed’s focus on the real economy rather than asset prices may allow for continued market volatility as policy normalizes. Ultimately, we think markets can move higher amid rate hikes and balance sheet run-off in 2022. 

Source: Bloomberg and Goldman Sachs Asset Management. As of January 26, 2022. “FOMC Statement Release” refers to 2:00pm EST, when the FOMC released its statement following its January 2022 meeting. “Chair Powell Press Conference” refers to 2:30pm EST to 3:30pm EST, the time during which Federal Reserve Chair Jerome Powell spoke following the statement release. Past performance does not guarantee future results, which may vary.

4) Is now the time to buy the dip?

• We think that this correction exists within a bull market cycle and equities may move higher. Although technical factors, normalizing earnings growth, and hawkish comments may bring continued volatility, these drivers have started to reflect in prices, suggesting further downside risks are much lower on the back of solid fundamentals. We believe now may be a good entry point for longerterm investors.
• Although the biggest risk is that high valuations continue to unwind as rates rise, the crucial third variable is GDP growth. Rising rates accompanied by slowing yet positive growth is associated with a still respectable historical 8% average 12-month S&P 500 return.
• In the absence of faltering fundamentals, equities are likely to make progress this year. We see any further significant weakness as a buying opportunity. 

Source: Bloomberg, Goldman Sachs Global Investment Research, Goldman Sachs Global Markets, and Goldman Sachs Asset Management. As of January 27, 2022. Past performance does not guarantee future results, which may vary. 

DISCLOSURES

Notes

“FOMC” refers to the Federal Reserve’s Federal Open Market Committee. “Basis points” refers to a unit represented by one hundredth of one percent. Gross Domestic Product (GDP) is the value of finished goods and services produced within a country's borders over one year. “Growth” refers to change in gross domestic product, year-over-year. “EPS” refers to earnings per share, which is the portion of a company's profit allocated to each outstanding share of common stock. Page 1 Chart: “Top-of-book liquidity” refers to the liquidity of the highest bid and the lowest ask in an order book. Page 2 Chart: “FOMC Statement Release” refers to the 2:00pm EST, when the FOMC released its statement following its January 2022 meeting. “Chair Powell Press Conference” refers to 2:30pm EST to 3:30pm EST, the time during which Federal Reserve Chair Jerome Powell spoke following the statement release. Past performance does not guarantee future results, which vary.

Glossary and Risk Considerations

The S&P 500 Index is the Standard & Poor’s 500 Composite Stock Prices Index of 500 stocks, an unmanaged index of common stock prices. The index figures do not reflect any deduction for fees, expenses or taxes. It is not possible to invest directly in an unmanaged index. The Nasdaq is the NASDAQ Composite Index. The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971. Equity securities are more volatile than fixed income securities and subject to greater risks. Small and mid-sized company stocks involve greater risks than those customarily associated with larger companies. The above are not an exhaustive list of potential risks. There may be additional risks that should be considered before any investment decision.

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