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Omicron variant may mean stock market rally is on hold: Goldman Sachs

The bull market of 2021 may be on temporary hold as investors assess the economic risk from the new Omicron variant of COVID-19, warns Goldman Sachs.

"We think a broad risk recovery may be impeded in the near term by the need to digest the prospect of a more hawkish Fed and a less consistent cyclical tailwind. Ironically, the Omicron scare itself may now create the best possibilities for relief in the coming weeks, either because incoming news is better than feared or because it prompts monetary policymakers to take a more cautious stance toward tightening," said Goldman Sachs strategist Dominic Wilson in a note on Monday.

Traders nervously tiptoed back into the markets Monday after the Dow Jones Industrial Average plunged more than 1,000 points the day after Thanksgiving. The violent sell-off transpired as reports of the Omicron variant spreading to more countries — leading to numerous fresh travel bans — took hold. Concerns mounted on the effectiveness of COVID-19 vaccines from Moderna, Pfizer and Johnson & Johnson against Omicron and other potential mutations.

The small-cap Russell 2000 Index saw its largest one-day drop since February on Friday, Wilson points out. Front month oil prices tanked 13%. The U.S. rates markets shifted from pricing in about three rate hikes in 2022 to pricing in less than two.

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High-risk stocks such as Rivian nosedived, while there was a flight to safety into stay-at-home stocks like Zoom.

On Sunday, Germany and Italy confirmed their first Omicron cases. Dr. Anthony Fauci warned in an interview Sunday the U.S. could see a fifth wave of COVID-19 infections.

Wilson is now concerned positive news on the global economy could subside as the new variant takes hold, raising the risk of further downside to stocks.

"Beyond renewed downside risks from Omicron, the main near-term challenge is that the strongest reason for recent cyclical optimism — consistent positive data surprises, especially from the U.S. —is a less obvious tailwind in the weeks ahead," Wilson added.

The strategist's muted take on stocks in the near-term is being echoed by others on the Street, despite the buy-the-dip crowd being out in full force.

"If the situation with the Omicron variant turns out to be something that does not have a big impact on growth, we will still be facing a much different situation than we were during the spring and summer months. Back then, inflation was seen as transitory… earnings estimates were rising … and the Fed was going to taper slowly (and wasn’t going to raise rates until 2023). None of these are still true today. Therefore, the odds that the stock market will rise in a significant way over the coming months had already declined … and the uncertainty surrounding this new variant should take those odds down further still," pointed out Matt Maley, Miller Tabak chief markets strategist.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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