GOLDMAN SACHS WARNS: There's a 'high probability' of a stock market correction in the coming months

  • Goldman Sachs says conditions point to the stock market seeing a 10-20% correction in the next few months.
  • The bank is the latest Wall Street firm to express direct concern over equity valuations, and warn against a potential weak patch.
  • Ultimately, strategists are bullish on US stocks for full-year 2018, and recommend that bulls add to positions on any first-half weakness.


Add Goldman Sachs to the list of Wall Street firms growing increasingly skeptical about the stock market's record-setting run.

The firm's global equity strategy team weighed in on Monday, noting that worldwide stock markets are off to their best start in more than 30 years. Their performance has been so strong, in fact, that both the S&P 500 and MSCI World Indexes have entered their longest period on record without a 5% correction.

On the floor of the NYSE:

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Traders gather at the post where Snap Inc. is traded, just before the opening bell on the floor of the New York Stock Exchange (NYSE) in New York, U.S., May 11, 2017. REUTERS/Brendan McDermid
Traders gather at the post where Snap Inc. is traded, just before the opening bell on the floor of the New York Stock Exchange (NYSE) in New York, U.S., May 11, 2017. REUTERS/Brendan McDermid
Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., May 3, 2017. REUTERS/Brendan McDermid
A trader works on the floor of the New York Stock Exchange at the closing bell of the Dow Industrial Average, May 10, 2017 in New York. Wall Street stocks dipped early Wednesday, with Disney shares sliding on worries about its ESPN network, and as the market weighed President Donald Trump's shock firing of FBI director James Comey. / AFP PHOTO / Bryan R. Smith (Photo credit should read BRYAN R. SMITH/AFP/Getty Images)
A video board displays the day's closing numbers at the New York Stock Exchange after the closing bell of the Dow Industrial Average, May 10, 2017 in New York. Wall Street stocks dipped early Wednesday, with Disney shares sliding on worries about its ESPN network, and as the market weighed President Donald Trump's shock firing of FBI director James Comey. / AFP PHOTO / Bryan R. Smith (Photo credit should read BRYAN R. SMITH/AFP/Getty Images)
Traders work on the floor of the New York Stock Exchange at the closing bell of the Dow Industrial Average, May 10, 2017 in New York. Wall Street stocks dipped early Wednesday, with Disney shares sliding on worries about its ESPN network, and as the market weighed President Donald Trump's shock firing of FBI director James Comey. / AFP PHOTO / Bryan R. Smith (Photo credit should read BRYAN R. SMITH/AFP/Getty Images)
Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Monday, May 8, 2017. U.S. stocks slipped from all-time highs, while Europe's common currency weakened following a convincing defeat of populism in France's presidential election that investors had already priced in. Photographer: Michael Nagle/Bloomberg via Getty Images
Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Friday, May 5, 2017. U.S. stocks fluctuated with the dollar and Treasuries as a rebound in hiring added to optimism that the economy is on firm footing, boosting speculation the Federal Reserve will raise interest rates. Photographer: Michael Nagle/Bloomberg via Getty Images
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That's likely to change in the next couple months, and investors should be braced for the turmoil, says Goldman.

Goldman notes that its proprietary GS Risk Appetite indicator is close to its highest ever, which reflects a sharp increase in investor optimism. The firm also points out that the CBOE Volatility Index — or VIX — has been rising alongside the S&P 500, reflecting increased risks, since the two gauges usually trade inversely to one another.

Still, Goldman says that the continuation of low core inflation and easy monetary policy suggest any pullback will be short-lived, and could even be a chance for bulls to increase positions.

"A correction of some kind seems a high probability in the coming months," Peter Oppenheimer, chief global equity strategist at Goldman, wrote in a client note. "We do not believe that this would be prolonged or morph into a bear market, and so would see it as a buying opportunity."

Goldman Sachs CEO Lloyd Blankfein:

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Goldman Sachs Chief Executive and Chairman Lloyd Blankfein shakes hands with other business leaders as they meet U.S. President Donald Trump and China's President Xi Jinping at the Great Hall of the People in Beijing, China, November 9, 2017. REUTERS/Jonathan Ernst
Goldman Sachs Group, Inc. Chairman and Chief Executive Officer Lloyd Blankfein participates in a panel discussion during the White House Summit on Working Families in Washington June 23, 2014. President Barack Obama, as part of efforts to make the U.S. workplace more accommodating for employees with families, will on Monday direct federal agencies to step up efforts to give workers more leeway in determining their schedules. REUTERS/Jonathan Ernst (UNITED STATES - Tags: POLITICS BUSINESS EMPLOYMENT)
Lloyd Blankfein, chairman and CEO of Goldman Sachs Group, attends the annual meeting of the World Economic Forum (WEF) in Davos January 25, 2013. REUTERS/Pascal Lauener (SWITZERLAND - Tags: POLITICS BUSINESS HEADSHOT)
Lloyd Blankfein, chairman and CEO of the Goldman Sachs Group, Inc., takes part in a panel at the Clinton Global Initiative (CGI) in New York September 25, 2013. The CGI was created by Bill Clinton in 2005 to gather global leaders to discuss solutions to the world's problems. REUTERS/Lucas Jackson (UNITED STATES - Tags: POLITICS BUSINESS)
Lloyd Blankfein, chairman and chief executive officer of Goldman Sachs Group Inc., reacts during a Bloomberg Television interview at the World Economic Forum (WEF) in Davos, Switzerland, on Thursday, Jan. 19, 2017. World leaders, influential executives, bankers and policy makers attend the 47th annual meeting of the World Economic Forum in Davos from Jan. 17 - 20. Photographer: Simon Dawson/Bloomberg via Getty Images
Lloyd Blankfein, chairman and chief executive officer of Goldman Sachs Group Inc., gestures while speaking during a panel session at the 10,000 Small Businesses (1OKSB) Partnership Event at their offices in London, U.K., on Wednesday, Dec. 14, 2016. The 'pendulum happily has swung by' the era when people criticized Goldman Sachs executives taking positions in public service, Blankfein said at the event. Photographer: Chris Ratcliffe/Bloomberg via Getty Images
Lloyd Blankfein, chairman and chief executive officer of Goldman Sachs Group Inc., speaks during the New York Times DealBook conference in New York, U.S., on Thursday, Nov. 10, 2016. The event brings together CEOs, leading figures in finance, and experts from diverse industries to assess the challenges and opportunities that will define the deal world of tomorrow. Photographer: Michael Nagle/Bloomberg via Getty Images
DANA POINT, CA - OCTOBER 18: Lloyd Blankfein speaks onstage at the Fortune Most Powerful Women Summit 2016 at Ritz-Carlton Laguna Niguel on October 18, 2016 in Dana Point, California. (Photo by Joe Scarnici/Getty Images for Fortune)
Goldman Sachs chairman and CEO Lloyd Blankfein speaks at the inaugural Goldman Sachs 10,000 Women/US State Department Entrepreneurship Program for women in the Middle East and Northern Africa on March 9, 2015 at the State Department in Washington, DC. AFP PHOTO/NICHOLAS KAMM (Photo credit should read NICHOLAS KAMM/AFP/Getty Images)
US Secretary of State John Kerry (L) shakes hands with Goldman Sachs chairman and CEO Lloyd Blankfein at the inaugural Goldman Sachs 10,000 Women/US State Department Entrepreneurship Program for women in the Middle East and Northern Africa on March 9, 2015 at the State Department in Washington, DC. . AFP PHOTO/NICHOLAS KAMM (Photo credit should read NICHOLAS KAMM/AFP/Getty Images)
MIAMI, FL - FEBRUARY 09: Goldman Sachs Chairman and CEO Lloyd Blankfein (L) stands behind Sen. Marco Rubio (R-FL) during the graduation ceremony for small business owners from the Goldman Sachs 10,000 Small Businesses program held at the Freedom Tower at Miami Dade College on February 9, 2015 in Miami, Florida. The Goldman Sachs 10,000 Small Businesses program helps owners in the Greater Miami area by providing them with greater access to business education, financial capital and business support services. (Photo by Joe Raedle/Getty Images)
SQUAWK BOX -- Pictured: Lloyd Blankfein, CEO and Chairman of Goldman Sachs, on January 7, 2015 -- (Photo by: Adam Jeffery/CNBC/NBCU Photo Bank via Getty Images)
Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc., speaks during a panel discussion at a Goldman Sachs 10,000 Small Businesses event in Detroit, Michigan, U.S., on Thursday, Sept. 18, 2014. Panelists discussed the future of Detroit, the economy and Goldman Sachs 10,000 Small Businesses program. Photographer: Jeff Kowalsky/Bloomberg via Getty Images
Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc., speaks during a panel discussion at the Center for American Progress (CAP) in Washington, D.C., U.S., on Tuesday, Nov. 5, 2013. The CAP event was titled 'Getting to Results by Investing for Impact.' Photographer: Andrew Harrer/Bloomberg via Getty Images
Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc., listens to a question during a news conference after a meeting with U.S. President Barack Obama at the White House in Washington, D.C., U.S., on Wednesday, Oct. 2, 2013. The meeting, set up by the Financial Services Forum, a Washington-based trade group representing CEOs for the largest Wall Street banks, marks an effort by the Obama administration to leverage the business community in the continuing debates over how to fund the government and increase the debt- limit. Photographer: Andrew Harrer/Bloomberg via Getty Images
Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc., speaks during an interview hosted by Politico in Washington, D.C., U.S., on Thursday, June 13, 2013. Blankfein said debate about when the Federal Reserve will raise interest rates may help avoid 'a jarring surprise' to markets. Photographer: Andrew Harrer/Bloomberg via Getty Images
Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc., listens during an interview hosted by Politico in Washington, D.C., U.S., on Thursday, June 13, 2013. Blankfein said debate about when the Federal Reserve will raise interest rates may help avoid 'a jarring surprise' to markets. Photographer: Andrew Harrer/Bloomberg via Getty Images
Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc., smiles before speak during the LaGuardia Community College 2013 commencement at the Jacob K. Javits center in New York, U.S., on Thursday, June 6, 2013. Blankfein told the graduating class that associating with ambitious people is one key to success in life. Photographer: Jin Lee/Bloomberg via Getty Images
Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc., speaks during an interview hosted by Politico in Washington, D.C., U.S., on Thursday, June 13, 2013. Blankfein said debate about when the Federal Reserve will raise interest rates may help avoid 'a jarring surprise' to markets. Photographer: Andrew Harrer/Bloomberg via Getty Images
Lloyd Blankfein, chairman and chief executive officer of Goldman Sachs Group Inc., speaks during an interview at the Investment Company Institute (ICI) general membership meeting in Washington, D.C., U.S., on Thursday, May 2, 2013. Blankfein warned that the interest-rate environment has parallels to 1994, when a sudden and sharp increase in rates caught many investors off-guard. Photographer: Andrew Harrer/Bloomberg via Getty Images
Lloyd Blankfein, chairman and chief executive officer of Goldman Sachs Group Inc., waits to start a television interview following a meeting with U.S. President Barack Obama at the White House in Washington, D.C., U.S., on Tuesday, Feb. 5, 2013. U.S. Obama urged Congress to postpone automatic spending cuts scheduled to begin March 1 to avoid 'real and lasting impacts' on U.S. economic growth. Photographer: Andrew Harrer/Bloomberg via Getty Images
Lloyd Blankfein, chairman and chief executive officer of Goldman Sachs Group Inc., speaks during a Bloomberg Television interview in San Francisco, California, U.S., on Tuesday, Feb. 12, 2013. Blankfein discussed the role of technology in innovation across different industries, the impact of the financial crisis on investment banking, and his plans to remain at with the company. Photographer: David Paul Morris/Bloomberg via Getty Images
Lloyd Blankfein, chairman and chief executive officer of Goldman Sachs Group Inc., arrives to the White House to meet with U.S. President Barack Obama in Washington, D.C., U.S., on Tuesday, Feb. 5, 2013. U.S. Obama urged Congress to postpone automatic spending cuts scheduled to begin March 1 to avoid 'real and lasting impacts' on U.S. economic growth. Photographer: Andrew Harrer/Bloomberg via Getty Images
Lloyd Blankfein, chairman and CEO of The Goldman Sachs Group waits before a meeting with French Finance Minister Pierre Moscovici at the French economy ministry in Paris on November 20, 2012. AFP PHOTO ERIC PIERMONT (Photo credit should read ERIC PIERMONT/AFP/Getty Images)
Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc., speaks at the Canadian Club of Toronto in Toronto, Ontario, Canada, on Wednesday, Sept. 19, 2012. Blankfein said he would invest in real estate as central banks around the world focus on avoiding deflation. Photographer: Norm Betts/Bloomberg via Getty Images
Lloyd Blankfein, chairman and chief executive officer of Goldman Sachs Group Inc., left, speaks with David Rubenstein, co-founder of The Carlyle Group LP, during a luncheon with the Economic Club of Washington in Washington, D.C., U.S., on Wednesday, July 18, 2012. Goldman Sachs, the fifth-biggest U.S. bank by assets, plans to cut $500 million of expenses this year, mostly from compensation, after reporting the lowest first-half revenue and earnings since 2005. Photographer: Joshua Roberts/Bloomberg via Getty Images
WASHINGTON, DC - JULY 18: Lloyd Blankfein, Chairman and CEO of the Goldman Sachs Group, listens to his introduction before speaking at the Economic Club of Washington luncheon, on July 18, 2012 in Washington, DC. Mr. Blankfein spoke about global economic issues and the state of job creation in the United States. (Photo by Mark Wilson/Getty Images)
Lloyd C. Blankfein, chairman and chief executive officer of Goldman Sachs Group Inc., listens during the Robin Hood Veterans Summit in New York, U.S., on Monday, May 7, 2012. The one-day summit discusses transitioning the country's armed forces personnel back to civilian life. Photographer: Scott Eells/Bloomberg via Getty Images
Lloyd Blankfein, chairman and chief executive officer of The Goldman Sachs Group Inc., right, talks to Greg Brown, president and chief executive officer of Motorola Solutions Inc., left, at the U.S.-China Business Roundtable at the Chamber of Commerce in Washington, D.C., U.S., on Tuesday, Feb. 14, 2012. President Barack Obama told Chinese Vice President Xi Jinping that China's growing economic power brings with it responsibility to work toward 'balanced' trade and to recognize the aspirations of all people for greater rights. Photographer: Andrew Harrer/Bloomberg via Getty Images
WASHINGTON - OCTOBER 04: Chairman and CEO of Goldman Sachs Group Lloyd Blankfein attends the Fortune Most Powerful Women summit at Mandarin Oriental Hotel on October 4, 2010 in Washington, DC. (Photo by Jemal Countess/Getty Images for Time Inc.)
Goldman Sachs CEO Lloyd Blankfein is sworn in prior to testifying before a Senate investigative committee on Capitol Hill in Washington, DC, April 27, 2010. Goldman Sachs denied reaping vast profits from the collapse of the US housing market as its top executive and a star trader faced hostile questions in Congress over the 2008 financial meltdown. AFP PHOTO / Jim WATSON (Photo credit should read JIM WATSON/AFP/Getty Images)
Lloyd C. Blankfein, chairman and chief executive officer of Goldman Sachs Group Inc., chats with other attendees prior to a speech by U.S. President Barack Obama speech about financial reform at Cooper Union in New York, U.S., on Thursday, April 22, 2010. Obama called on the financial industry to drop it's 'furious efforts' to fight his regulation plan, saying a failure to impose tougher rules on the market will put the U.S. economic system at risk. Photographer: Daniel Acker/Bloomberg via Getty Images *** Local Cation *** Lloyd C. Blankfein
NEW YORK - OCTOBER 16: Lloyd Blankfein, Chairman and CEO of Goldman Sach's during Fortune's Andy Serwer interview of Goldman Sachs' Lloyd Blankfein at Bobby Van's Grill on October 16, 2009 in New York City. (Photo by Jemal Countess/Getty Images for Time Magazine)
Lloyd Blankfein, Chairman and CEO of Goldman Sachs, participates in a panel discussion at the Clinton Global Initiative in New York September 23, 2009. About 1,200 participants including heads of state, business leaders, humanitarians and celebrities will attend the fifth annual Clinton Global Initiative (CGI) which started on Tuesday. REUTERS/Chip East (UNITED STATES POLITICS BUSINESS)
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The average bull market correction — defined as a 10-20% decline — has amounted to 13% over a four-month period, and takes just four months to recover, according to Goldman data. As such, even after a correction in the first half of 2018, the S&P 500 still has a great chance to finish 2018 higher, the firm says.

The combination of Goldman's short-term skepticism and longer-term bullishness isn't necessarily unique to the firm. Bank of America Merrill Lynch's global investment strategy team has been sounding the alarm for months on investor overexuberance. The situation has gotten so drastic that BAML recently referred to the confluence of factors as a "non-stop euphoric cabaret."

However, like Goldman, BAML says it will be largely constructive on stocks once this euphoria shakes out of current valuations. So with that outlook established the key question becomes, what can an investor do in the meantime to avoid being caught off-guard?

Goldman recommends the purchase of put spreads, which are used when a moderate decline in an underlying asset is expected. In a put spread, a trader buys a specific number of put contracts — probably on the S&P 500 in this scenario — while also selling the same number of puts at a lower strike price.

Using this method could save you some pain if a first-quarter downturn comes as Goldman, BAML and their Wall Street brethren expect. After all, even if the market finishes the year markedly higher, it's highly unlikely to move in a straight line.

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SEE ALSO: Stocks are facing a barrage of sell signals as the market's 'non-stop euphoric cabaret' rages on

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