Goldman Sachs warns that volatility in the stock markets will remain high in the long term, not because of geopolitical developments, but because of two structural factors. Firstly, the high concentration of the market in artificial intelligence shares, reminiscent of the technological boom of the late 1990s. Since 1932 no such concentrated market had been observed. Secondly, rising unemployment in the USA, which has risen from the low levels of 2023, is statistically correlated with greater variability. Analysts predict continued instability even with a favourable macroeconomic environment.
Analyticalally:
The instability is the new regularity in the stock markets, according to Goldman Sachs, which is not so much due to the turmoil caused by geopolitical developments, such as the war in Iran.
The conflict in the Middle East may have fueled the recent variability we saw in the shares, however, Goldman Sachs analysts see an ongoing structural reinforcement of long-term variability after the end of the war.
«I believe that there are good reasons to expect that the volatility of shares could move structurally higher over time, even with a favourable macroeconomic background and even if share prices continue to be strengthened, as some of the forces that pushed the volatility of shares higher in the late 1990s, as the boom of investment in technology grew increasingly important.», noted Goldman Sachs analysts.
The «obvious» They stated that there are other underlying structural forces contributing to their prospects for a longer period of volatility.
So instead of the war in Iran, the two biggest players in a more unstable stock market will be the highest concentration of the market and highest unemployment.
Market concentration creates volatility in shares
The rising course of the stock market in recent years has been attributed to the boom of artificial intelligence as investors turn to emerging technologies, a setting that prepares stock for greater volatility.
«We believe that the concentration of value in fields of the Artificial Intelligence-related market increases the risk of higher variability over time, as the focus increases to whether the benefits of Artificial Intelligence justify this value as the cycle of Artificial Intelligence matures», argues Goldman Sachs.
Market concentration has historically increased significantly, as artificial intelligence feeds profits for larger companies. The last time the stock market was so concentrated at the top was in 1932, during the Great Depression.
This is the phenomenon we saw earlier this year, leading to significant losses in the shares of Artificial Intelligence and the wider market.
As Goldman Sachs said, the concentration of the market and the high valuations are «non-Macroeconomic» factors taken into account in its variableity model. «Increasing concentration and high valuations are market symptoms driven by Artificial Intelligence, as it was during technological boom in the late 1990s», report to her note.
Unemployment figures show an upward trend in stock volatility
Unemployment is the second main factor in the volatility of shares noted by Goldman Sachs. The Bank’s volatility model takes into account levels and changes in the US unemployment rate, with the highest unemployment associated with higher volatility.
«The intuition here is that these measures indicate the stage of the economic cycle»They wrote.
The unemployment rate in the US has risen slightly from the low levels of 2023.
«We find a statistically significant relationship between variability in labour market data and the volatility of shares – likely through uncertainty about future outcomes (where higher variability of data relates to increased uncertainty about macroeconomic prospects)»The bank wrote.
With information from Business Insider
