Goldman Sachs says the bear market isn’t over yet, and explains why

Major averages on Wall Street have rebounded for most of this week , ending Thursday in positive territory as tech shares staged a comeback . While that has sparked talk that the bulls are returning to the market, the rally could be about to lose steam, with Nasdaq futures sliding early Friday as investors digested a fresh batch of corporate earnings and disappointing results from Snap . Strategists at Goldman Sachs and elsewhere said this week that they don’t believe this bear market has bottomed yet, amid recession fears and hot inflation. Earnings One key factor in determining the bottom is earnings, according to Sharon Bell, senior European equity strategist at Goldman Sachs. “We don’t see this bear market as quite over yet,” she told CNBC’s “Squawk Box Europe” on Tuesday. “I think that we haven’t yet really seen earnings estimates come down … margins are still pretty high.” She added that valuations, particularly in Europe, are “certainly not at trough levels that you normally see during a bear market, so yes, I think there are risks to the downside.” Bell said that the first half of this year had been “pretty good,” with reasonably strong economic growth, and that even with high inflation, companies have managed to pass on some of those additional price increases, she added. “But I think it will become more difficult to pass through to consumers and we are expecting margins to be squeezed,” Bell said. Analysts are projecting earnings per share of $226.92 by the end of this year, or one-year growth of 10.05%, and $246 by the end of 2023, or 8.69%, according to FactSet. In a recession scenario, those numbers could look worse. In Europe, earnings decline around 20% to 30% in an average recession, while the median has been around a 14% drop for the S & P 500 in the past eight recessions, according to Bell. She said margins and earnings estimates are set to go down from here. “So yes, I think there are still [risks] to the downside,” Bell said. “We’ve got a little bit further to go.” Inflation The second factor in identifying whether the bear market has bottomed is peak inflation, according to Goldman. In a June 14 report, Bell noted that headline inflation has peaked above 3% in the U.S. 13 times since 1950 – and the S & P 500 has usually fallen in the run-up to those peaks, and on average recovered after the peaks. “That said, the strongest post-inflation-peak rallies benefitted from at least one of three factors: a sharp inflection in economic growth, undemanding valuations, and falling rates,” Bell wrote. So are we near the peak? Bell said that Goldman economists predict U.S. headline inflation will remain at current levels for the next few months before declining in late fall. In the U.K., it may peak in October. U.S. inflation soared 9.1% in June from a year ago, above estimates and marking the fastest pace since November 1981. What the Fed does matters Wolfe Research expects this bear market rally to be a short lived one, saying that its bearish base case remains intact. “We primarily attribute the recent bounce to investor sentiment (which is a contra-indicator) hitting extreme lows, which set stocks up for a strong near-term bounce,” it said in a note Wednesday . In a separate note Tuesday, Wolfe Research analysts said trading is “likely to remain very choppy,” with more bear market rallies in the months ahead. The research house doesn’t see stocks bottoming over the intermediate term until investors gain more clarity about future moves from the U.S. Federal Reserve. The firm said it believes the Fed has two basic choices: sharply tighten policy and spark a deep recession that “crushes” inflation, or moderately tighten and cause a milder recession that fails to resolve the inflation problem. Most analysts now expect to Fed to hike rates by three-quarters of a point this month — not a full percentage point as was mooted by some last week .