There may be little upside left in this stock rally, says Goldman Sachs. Here’s where it advises investors to put their money now.

It’s no mean feat for a market that was ready to cruise into a COVID-19 bounce, but instead got war, surging inflation and a Federal Reserve fired up to increase rates. Our call of the day, from a team at Goldman Sachs led by chief global strategist Peter Oppenheimer, warns this stock market’s best days are over for now.

While it’s perfectly understandable that investors may have missed this latest rally, Oppenheimer’s team sees “little upside in the short term” — the team’s end-2022 target is 4,700, just 2% above current levels.

“We continue to see this as a ‘fat and flat’ market environment — a wider trading range and lower returns than in the post financial crisis era. There remains risks of corrections in an environment in which equities continue to outperform bonds,” the team said.

In the near term, investors should watch second-quarter economic data and coming earnings for signs of trouble. Goldman economists see a 25% to 30% shot at recession in the U.S. over the next year, which could drive the S&P 500 to 3,600, or a drop of 22% from current levels.

As for where to invest now, Goldman brushes aside the growth versus value obsession and says focus on alpha — companies that can innovate, disrupt, enable and adapt. As well, look for companies that can deliver high and stable margins, instead of those with higher-revenue and record-high valuations that were chased in the last cycle.

Also important — building a wall around portfolios using broad diversification across assets, geographies and sectors, i.e. real estate and commodities. Hedging is also important, and with the VIX volatility index
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