Goldman Sachs downgraded its global equities to neutral

Goldman Sachs downgraded its global equities allocation to neutral on a short-term basis on Friday, even though the brokerage remains overweight stocks for the longer term.

The firm said in a research note it is worried that a rise in rates will drive stocks lower over the next three months, adding that “we also expect the general pace of returns to slow compared to what we have seen in the last couple of years.”

“We are concerned that a sell-off in government bonds will lead to a temporary sell-off in equities in line with what we saw last summer, though the magnitude is likely to be smaller as the need for bond yields to correct is lower than it was back then,” Goldman said.

The firm also downgraded corporate bonds to “underweight” over 3 and 12 months. Stocks held onto their already sharply lower levels on the news.

“A sell-off in bonds could lead to a temporary sell-off in equities,” Goldman said. “This makes the near-term risk/reward less attractive despite our strong conviction that equities are the best positioned asset class over 12 months, where we remain overweight.”

U.S. stocks maintained losses in the final trading hour as the Goldman note circulated across trading desks. The Dow Jones Industrial Average dropped 123 points, or 0.7%, to 16960. The S&P 500 fell 10 points, or 0.5%, to 1978.

Equity markets worldwide have rallied steadily through the year. The MSCI All-World Index hit a record in early July, having gained more than 5 percent in 2014. Goldman noted that the gap between dividend yields and government bond yields remains high, and that measure suggests more outperformance by the equity market.

Dividing the world up by regions, Goldman is overweight in Europe and Japan and underweight in the United States. When looking at specific sectors, the firm is high on growth industries – it has overweight ratings for technology stocks in the United States, Europe, Japan, and Asia.

“Growth has improved substantially,” the firm said. “Most of the acceleration we had expected is now behind us, but we expect growth to be sustained at current or slightly higher levels, with the US growing at around 3% through 2017. We think the likelihood of a rise in government bond yields has increased and see this as a key aspect of the near-term macro outlook.” Read more about the story here.