“Recession is a key downside risk,” Goldman’s David Kostin mused, in his latest note.

It’s tempting to chuckle at trite observations, but the fact is, that’s all any of us are capable of these days. Transcripts of Q1 earnings calls were a Rolodex of banality.

Ironically, our collective inability to say anything original stems mostly from the fact that these times of ours are so extraordinary. The macro outlook is so hopelessly fraught that we’re reduced to vapid assessments. “Uncertainty is high.” “Recession is a key downside risk.” And so on.

We can make a list of risk factors, but when that list includes a voluntary US debt default, nuclear war, the permanent dissolution of globalized supply chains, the regionalization of finance and trade out of perceived geostrategic necessity and so on, we may as well just throw up our hands.

Alas, risk enumeration (on both sides) is an obligatory exercise, and Goldman’s Kostin dutifully performed it while assessing the bank’s year-end S&P target, which is still 4,000, predicated on the assumption the US economy and corporate earnings muddle through, but rising yields and stretched valuations limit upside.

In the near-term, three quarters of the S&P is set to exit buyback blackouts, but Kostin noted, somewhat tautologically, that the effect is generally limited to the companies actually buying back shares. And although authorizations are running high in 2023, executions are down sharply.

Of course, we’re also entering the worst stretch of the year for stocks historically. Although May itself doesn’t stick out as a bad month, there’s something to the old “sell in May and go away” adage. “Stocks have averaged an annualized return of just 5% from May through October, as compared with 13% from January through April and 17% from November through December,” Kostin remarked. The figure on the right below illustrates the dynamic, which Goldman was keen to note may simply be the result of psychology. “Popular narratives can often become self-fulfilling prophecies,” as Kostin put it.

On the bright side, earnings have come in better than expected. In aggregate, profits are down 5% YoY with two-thirds of market cap reporting. Consensus expected a 9% decline headed into earnings season. Revisions have inflected for the better as well.

As for the end of Fed hikes, Kostin reiterated familiar talking points. “In the six cycles since 1984, the S&P 500 has posted an average three-month return of 8% following the peak funds rate, rising in five of six episodes [but] the conclusion of this cycle may differ from the historical pattern,” he said. The index has already re-rated in 2023, and a resilient economy or stubborn inflation could put a floor under long-end yields, limiting the potential for additional multiple expansion.

Kostin also flagged a rebound in positioning to more neutral levels (i.e., one possible contrarian indicator is no longer flashing a buy signal), a collapse in market breadth (as discussed at some length in the latest weekly+) and then, coming quickly full circle, a prospective recession which, while not Goldman’s base case in the near-term, could push stocks lower by nearly 25%, on Kostin’s thinking.

Finally, he noted that “the major upside risk to our forecast is that a sharp decline in inflation allows for EPS growth to lift equities without offsetting downward pressure on valuations from rising interest rates.” Again: We’re limited to trite observations in these extraordinary times.