Goldman Sachs: Threat of recession is most important issue for equities

The most important question for the equities market is whether the U.S. economy will enter a recession in 2023, said Ryan Hammond, Goldman Sachs vice president.

And the chances of a recession happening?

Hammond said Goldman Sachs Economics predicts a 25% chance of a recession occurring in the U.S. in the next 12 months. He discussed that prediction during a recent webinar.

“What we’re hearing from many investors we talked to is that Federal Reserve policy will tip the economy into recession,” he said. “But our economists believe recession is avoidable.”

Interest rates are the driving factor on whether the U.S. goes into a recession, Hammond said.

He said Goldman Sachs predicts interest rates will remain high through 2023, with the Fed hiking rates three more times before the end of the year.

“...We believe we are in a more challenging environment where interest rates will be higher for longer.” Ryan Hammond, Goldman Sachs vice president

“We think interest rates will be higher for longer,” he said. “This a big shift from the last cycle we had where the Fed was easing and interest rates were low. Now we believe we are in a more challenging environment where interest rates will be higher for longer.”

Interest rates are a key driver for equity valuations as well, Hammond said. He said U.S. equities are at one of their highest rates in history. But Goldman Sachs predicts weak earnings growth, even if the economy experiences what is called “a soft landing.”

The S&P 500 earnings per share estimate is predicted to grow by about 1% year over year, Hammond said, provided the U.S. stays out of a recession. If recession becomes reality, EPS could drop by 10% year over year.

The earnings prediction, Hammond said, stems from several factors, including companies’ continuing to face higher costs and wage pressures. On the positive side, however, he noted that inflation seems to be easing, supply chains are balancing and the job market remains strong. In addition, China is reopening from COVID-19 restrictions and a warmer-than-usual winter in Europe eased fears of an energy crisis.

Goldman Sachs predicts the S&P 500 index could fall to 3150 at year end from its high of 4797 in January 2022 if the U.S. falls into a recession. However, the index could end the year at 4000 if the U.S. economy reaches a soft landing.

 

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at Susan.Rupe@innfeedback.com. Follow her on Twitter @INNsusan.

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