Goldman Sachs Research has said in their recent note that the S&P 500 might be vulnerable to deeper declines, however, analyst says a “major policy pivot” by the Donald Trump-led administration or the central bank could help the markets recover.

What Happened: Goldman Sachs’ Christian Mueller-Glissmann, leading asset allocation research, has warned that the risk of further market correction is still looming in the U.S. He cautioned that the deteriorating macro backdrop leaves the market vulnerable to further correction, even without a predicted recession.

"The equity drawdown probability hasn't peaked yet," he said. The note added, “Our strategists' equity drawdown risk model, which forecasts the probability of the S&P 500 falling, suggests U.S. stocks are at risk of further declines.”

The reasons why Goldman Sachs Research believes that the market correction has more legs include:

Its model’s prediction signaling an elevated risk since January, which hasn’t indicated a peak in the probability of further declines.

A deteriorating macroeconomic environment, along with the drawdown in equity, suggests that a market bottom hasn’t been reached.

The risk appetite indicator, which gauges investor sentiment, is not yet at the ‘-2’ level, which historically signals a potential market reversal without policy or economic changes. This indicator is still above the point that would indicate a strong buying opportunity.

The Magnificent Seven tech stocks, which are crucial drivers of retail investor confidence, have seen significant declines, and a further fall in these stocks could damage investor sentiment.

European and Chinese equities, which are outperforming the U.S., tend to historically outrun the U.S. initially, but eventually follow the trend during larger corrections. Therefore, if the U.S. correction deepens, it could drag down global markets.

See Also: Federal Reserve Is ‘Gaslighting The Public,’ Warns Expert As Richmond Fed President Says ‘Inflation Expectations Have Loosened, Not De-Anchored’

Why It Matters: Mueller-Glissmann acknowledges a key limitation of his equity drawdown model: it doesn’t account for policy changes.

“So if there's a major policy pivot from President Trump or the Federal Reserve, of course, markets could recover much faster,” he said.

Despite market volatility, he notes that the classic 60/40 portfolio, with its 60% equity and 40% bond allocation, has remained resilient this year. "Equities are down in the U.S., but bonds have rallied in the year to date. And in Europe, bonds are down, but equities have rallied," adds Mueller-Glissmann.

Thus, the diversification achieved by holding both stocks and bonds across these regions successfully maintained portfolio returns despite the year’s initial volatility.

Apart from this, Goldman Sachs has increased its U.S. recession probability from 20% to 35%, as of March 30.

Price Action: The SPDR S&P 500 ETF Trust ( SPY ) and Invesco QQQ Trust ETF , which track the S&P 500 index and Nasdaq 100 index, respectively, declined on Friday. The SPY was down 2.01% to $555.66, while the QQQ declined 2.63% to $468.94, according to Benzinga Pro data.

On Monday, the futures of Dow Jones fell by 0.35%, whereas the S&P 500 and Nasdaq 100 declined by 0.62% and 1.10%, respectively.

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