The New Small Business Environment...October QuickPoll...Rising Rates and Equities

[Goldman Sachs]( [BRIEFINGS] October 14, 2021 Small Businesses Hunker Down for a Tough Winter Above (L to R): Joe Wall of Goldman Sachs with Ruby Bugarin, Khari Parker and Rosemary Swierk The global economy is recovering—but don't tell that to small businesses. Faced with inflation, a labor shortage and supply chain snafus, small business owners have become increasingly pessimistic about the post-pandemic future, explains Goldman Sachs’ Joe Wall of the Office of Government Affairs. On a new episode of Exchanges at Goldman Sachs, Wall shares the results of a recent 10,000 Small Businesses Voices survey, noting that only 31% of small business are “very confident” that they would be able to access capital if they needed to and 44% have less than three months of cash reserves. “The reality is [that] more relief might be needed just given where things are today,” Wall says. Khari Parker, co-owner of Connie’s Chicken & Waffles in Maryland, tells host Allison Nathan he’s particularly worried about a slowdown in sales heading into winter. “We’re trying to do as much as we can right now by finding efficiencies within the business and setting more aside,” Parker says. Other business owners say they are overwhelmed. “We're used to being able to pivot and kind of adapt to different things. But now it's like, ‘Oh my gosh, I'm only on one toe because I'm trying to balance everything on my hands and legs,’” says Ruby Bugarin, co-owner of Margaritas and Pepe’s Mexican Restaurants in the Los Angeles area. And some small businesses think the outlook ahead may not be so rosy. Rosemary Swierk, president of Direct Steel and Construction in Crystal Lake, Illinois, notes: “We're hearing projections that [supply chain delays are] going to stay another 12 months and that's going to have a major detrimental impact on small businesses.” [Listen to podcast]( [Read survey]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=The%20New%20Small-Business%20Environment%3A%20Worker%20Shortages%2C%20Inflation%20and%20Supply%20Chain%20Delays&body=https%3A%2F%2Fyoutu.be%2FUGdgoLuOCAk) October QuickPoll: Waiting for Reflation, not Stagflation Concerns about COVID-19 are receding while worries over inflation, growth and a slowdown in China are rising, according to the latest Marquee QuickPoll survey of 944 institutional investor clients. Key findings include: Reflation, not stagflation. Rising commodity prices may be stoking inflation fears but few investors (11%) expect stagflation to become a reality. Rather, 43% of those surveyed expect above-target inflation and above-average growth in the U.S. to create a reflationary environment in 2022. Meanwhile, worries about COVID-19 have virtually disappeared from investors’ risk radars this month, while concerns over growth—and potential central bank tightening—are reaching historic highs. China’s (soft? hard?) landing. While markets now believe the financial risks in China’s property sector are contained, investors are turning their attention to the country’s growth trajectory. While the majority of surveyed investors (65%) expect China’s economy to slow in 2022 versus its pre-pandemic growth target of 6%, only 8% expect a hard landing. “This seems to point to China-related assets being well positioned for a cyclical bounce following a significant correction and with solid export growth to offset a domestic downturn,” says Oscar Ostlund, head of content for Marquee, the digital platform for the Global Markets Division. Sentiment turns bearish. The last time investors felt this bearish was summer 2020. In this latest survey, 48% of respondents indicated that, on the margin, they are more likely to decrease risk levels in their portfolios. “The global growth stories have taken a breather as China deals with the property sector slowdown and Europe deals with a natural gas crunch,” Ostlund says. “So while 30% of investors expect the S&P 500 to be the best-performing major equity market in October, investors are also concerned that U.S. equities are the ‘most crowded’ position—which may lead to rotation out of growth and tech stocks.” For more information about QuickPoll and Marquee, [reach out to the team](mailto:gs-marquee-sales@ny.email.gs.com?subject=BRIEFINGS%20Follow-Up%3A%20Interested%20in%20Learning%20More%20About%20Marquee&body=BRIEFINGS%20Follow-Up%3A%20Interested%20in%20Learning%20More%20About%20Marquee.). SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=October%20QuickPoll%3A%20Reflation%2C%20Growth%20and%20China%20Slowdown&body=) How One Nonprofit Is Diversifying the Tech Industry Above (L to R): Asahi Pompey of Goldman Sachs and Kimberly Bryant of Black Girls Code A recent session of Talks at GS featured Kimberly Bryant, founder of Black Girls Code (BGC), a nonprofit dedicated to introducing girls of color to the fields of technology and computer science. Bryant spoke with Goldman Sachs’ Asahi Pompey, global head of Corporate Engagement, on a number of topics, including Bryant’s own history in the biotech industry, the demographic shifts in the technology sector and how BGC went from grassroots to global. Here are some highlights: On diversifying the tech industry: “I think one of the things that we’re struggling to catch up with is to change that narrative of who should be and can be a computer scientist…I think we're slowly starting to change that narrative, as this next generation comes into their own. But I think we still have a very long way to go.” On teaching girls of color how to be leaders: “This is not just about teaching girls about technology. This is about teaching them and giving them the tools to be change agents—and change agents that will impact not just their own lives, their own families, but change agents who will bring novel solutions to the world.” On moving to virtual training and seeing BGC expand across the globe: “We put it online, and when we hit ‘On’ for the event and folks were allowed to register, we saw the numbers of registrants start ticking up exponentially every second. We were like, ‘Something is wrong. We've done something wrong. Is this for real?’ And in that first day, we had almost a thousand registrants for that very first virtual event. It was mind blowing.” [Watch video]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=How%20the%20Black%20Girls%20Code%20Nonprofit%20Is%20Diversifying%20the%20Tech%20Industry&body=https%3A%2F%2Fyoutu.be%2FRQUPr-yPLvQ) Briefly…on the Impact of Rising Rates on Equities Amid rising worries over inflation and rates, investors are anxiously assessing the impact for stocks. We sat down with Goldman Sachs Research’s Ben Snider who shared his thoughts on what he sees as the biggest concerns for equity investors, the interplay between rates and equities, and what to expect for the upcoming earnings season. Ben, how significant has the low-rate environment been to your constructive view on equities, and how does that view change, if at all, as we see real rates rise? Ben Snider: Declining rates have certainly given a major boost to equities, which you can see clearly in valuations. If you look at absolute metrics, such as price-to-earnings, price-to-book and EV-to-EBITDA, valuations seem extremely high, ranking between the 95th and 99th historical percentiles. But when you adjust for today’s low interest rates, equities actually look more attractively valued than historical averages. Now as rates begin to rise, valuations potentially come under pressure, and that’s heightened by the fact that in recent years markets and portfolios have become concentrated in secular growth stocks that are particularly rate-sensitive. So it’s not surprising that the most common question we get is: “How high would rates need to rise before they hurt equity investors?” In our view, rates would have to rise dramatically to threaten equity valuations. As an example, if you were to keep the current S&P 500 P/E multiple constant at around 20x, we’d have to see the nominal yield on the 10-year Treasury jump to roughly 2.3% for equity valuations to rank above their historical averages on a relative basis. Assuming we don’t see such dramatic rate increases, what else could shift the needle on equities’ attractiveness? Ben Snider: Besides the level of rates, the volatility of yields is also important dynamic. Historically, when rates rise by two or more standard deviations in a month, equities react poorly. We saw this play out in February and March, as well as in recent weeks. So going forward, we would expect rates to rise but would be more focused on the volatility than the level of the rate increase. It’s also important to consider why rates are rising. If it’s because growth expectations are improving, equities generally do pretty well in that type of environment. But what’s troubling investors today is the expectation of Fed tightening which, in turn, is lifting real rates. So even if rates are rising, that doesn’t mean that equities will decline in absolute terms. In fact, we expect equities—driven by earnings growth—will continue to appreciate alongside modestly higher yields. Consider this: Corporate earnings have accounted for all of the year-to-date S&P 500 returns. So as we kick off another U.S. earnings season, what are you expecting? Ben Snider: The earnings reports themselves should be pretty strong, with bottom-up consensus numbers forecasting year-over-year earnings growth of 27%. It’s pretty amazing to be discussing concerns around the earnings outlook when you’re expecting that kind of growth, but the reality is that it’s a sharp deceleration from the 88% earnings growth reported in the second quarter. Analysts have been very conservative with their estimates given the high levels of macro uncertainty and cautious management guidance, and bottom-up consensus is actually forecasting 50 basis points of profit margin contraction this quarter compared to the last, which we think highlights a key focus for this earnings season: Input cost pressures. Investors and corporate management teams we’ve spoken with have been very focused on factors related to input costs, from labor supply and wages to energy input costs to supply chain problems. The real question this season is how companies are dealing with these pressures. Because analysts have set a low bar, in my view, we do expect a good amount of “beats”, although we expect the stock price reactions to be muted with investors more focused on management guidance. [Read more Briefly Q&As]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Briefly%E2%80%A6on%20the%20Impact%20of%20Rising%20Rates%20on%20Equities&body=https%3A%2F%2Fwww.goldmansachs.com%2Fbriefings%2Fimages%2Femail%2FBriefly_Ben_Snider_530x300_jpg.jpg) Goldman Sachs Media Highlights Fortune - October 12 [Why Goldman Sachs Is Investing Billions to Address the Disparities Black Women Face]( Bloomberg - October 11 [Goldman’s Hatzius: No Fed Rate Hike Next Year as Growth Slows]( (1:41) [Subscribe]( [Unsubscribe]( The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. Goldman Sachs believes the data in this newsletter is accurate, but does not verify its accuracy independently and does not warrant or guarantee that it is accurate or complete. Goldman Sachs has no obligation to provide any updates or changes to the data. 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