Investors should consider the risk of a successful coronavirus vaccine unsettling markets by sparking a sell-off in bonds and rotation out of technology into cyclical stocks, warned Goldman Sachs Group Inc.

The increased probability of an approved vaccine by the end of November is under priced by equity markets and by that time the result of the US election will be known, wrote strategists including Kamakshya Trivedi in a note Wednesday. Investors will also know how the start of the school year will have impacted the spread of the coronavirus, they said.

Approval of a vaccine could challenge market assumptions both about cyclicality and about eternally negative real rates, the team wrote, adding such a scenario may support steeper yield curves, traditional cyclicals and banks, while challenging the leadership of technology stocks.

If this happened along with a change in the US administration, emerging market equities could benefit if trade policy risks diminish while US tax risks rise, according to the note.

While the strategists suggested it may be too early for investors to position themselves aggressively for such a shift, they recommended options trades as a way to play the theme. For example, some call options on the S&P 500 still look attractive, and Goldman sees upside to around the 3,700 level should there be an early vaccine.

That compares with a potential downside target of 2,200 should there be a significant reversal of activity from a second wave of the virus, the strategists added. The US benchmark closed just under 3,328 on Wednesday.

The Goldman team was more forthright on keeping its bearish view on the dollar.

The range of outcomes is wide and our highest confidence is still in ongoing US dollar weakness, they said.

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