What caused the stock market to drop?
The immediate causes of the market decline included an increase in policy uncertainty (largely driven by tariffs), concerns about the economic growth outlook, and investors — particularly hedge funds — unwinding their positions.
Goldman Sachs Research economists recently revised their expectation for the average US tariff rate, which is now projected to rise around 10 percentage points to 13%.
The US stocks team’s rule of thumb is that every five-percentage-point increase in the US tariff rate reduces S&P 500 earnings per share by roughly 1-2%, assuming companies are able to pass through most of the tariffs to consumers.
Similarly, early indicators of weaker-than-expected economic activity in the US affect the outlook for the stock market, because weaker economic growth usually translates to weaker corporate earnings growth.
Goldman Sachs Research economists recently lowered their forecast for real US GDP growth to 1.7% year-on-year by the end of the 2025 financial year, down from 2.2% previously.
The market decline also reflects a major unwind in positioning, especially among hedge funds. Goldman Sach Research’s basket of most-popular stocks among hedge funds has suffered its sharpest period of underperformance relative to the S&P 500 in five years.
And more than half of the S&P 500 index’s 10% drop from its all-time high in February came from a selloff of the large US tech companies known as the Magnificent Seven.
Which stocks should investors buy?
To protect their portfolios, Kostin’s team suggests that investors favor “insensitive” stocks that are insulated from the major themes driving fluctuations in the markets.
For example, investors can screen for the stocks with the lowest recent sensitivity to the equity market’s pricing of US economic growth, trade risk, and artificial intelligence.
Additionally, Kostin writes, “investors should consider stocks hammered by the hedge fund positioning unwind that trade at discounted valuations.” In particular, he highlights stocks that are popular with hedge funds that have declined by more than 15% from their highs and trade at or below their three-year median price / earnings multiple.
For the stock market to recover, Kostin writes, one of three things needs to happen:
- An improvement in the outlook for US economic activity, either due to better growth data or more certainty around tariff policy
- Equity valuations that price economic growth well below Goldman Sachs Research’s baseline forecast
- Investor positioning falling to depressed levels
This article is being provided for educational purposes only. The information contained in this article does not constitute a recommendation from any Goldman Sachs entity to the recipient, and Goldman Sachs is not providing any financial, economic, legal, investment, accounting, or tax advice through this article or to its recipient. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this article and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.
Source: goldmansachs.com
