Housing’s in freefall. Big Tech is slowing down. Even at Coca-Cola KO, which surprised to the upside for the third quarter, CEO James Quincey flagged “there are some changes in consumer behavior going on.”

 

So of course, the U.S. stock market is starting to rev higher, with the S&P 500 SPX up five of the last seven sessions, though it’s looking like Wednesday could be rough after Alphabet and Microsoft results. The market is forward looking, to a time when the Fed sees a need to cut interest rates, rather than hike them to choke off the economy.

 

Strategists at Goldman Sachs say the move feels premature. “Because we have not decisively met either of the two conditions—convincing inflation relief or a shift towards outright recession—that we think are necessary for a sustained shift, we do not think the pressure for tighter financial conditions is at an end,” they say.

 

The strategists — Kamakshya Trivedi and Dominic Wilson — say there has been “inching,” in their words, toward both conditions. “So after a sharp tightening, the threshold for some near-term relief is lower,” they said.

 

But the issue is that inflation news could still disappoint. “If the Fed slowed the pace of hikes and subsequent inflation news disappointed, energy prices moved materially higher or financial conditions eased sharply, they might find themselves pushing back against the market relatively quickly or risking uncomfortable pressure on back-end yields. So unless the inflation news turns convincingly better, we could still find ourselves back in the [financial conditions] loop relatively soon,” they said.

 

The other big risk is that a severe recession develops. No asset, they say, is priced for a big downturn, though the rates markets and the U.S. dollar are pricing in a greater possibility than the stock market or corporate credit.

 

The strategists conclude by saying “the broader case for U.S. equities does not look very strong and the normal conditions for an equity trough are not clearly visible yet. Equities have not fully reflected the latest rise in real yields and any significant easing in financial conditions through higher equities will likely be offset by policy in the end.”