Even Goldman Sachs is succumbing to the gloomy mood on Wall Street by abandoning its earlier bullish stance and warning that US stocks will end the year in the red.
Goldman Sachs (GS) took an ax Thursday night in its stock market forecast, cutting its year-end target for the S&P 500 from 4,300 to just 3,600. That implies a further 2% drop from current levels and no lasting rebound.
Worse yet, the Wall Street bank is warning of further trouble for stocks in a potential recession and acknowledging risks to its outlook are tilted to the downside.
“The picture is unusually murky,” Goldman Sachs strategists wrote in the report. “Future paths for inflation, economic growth, interest rates, earnings and valuations are changing more than usual with a wider distribution of potential outcomes.”
In other words, nobody really knows what happens next.
That uncertainty is contributing to the ongoing sell-off in the stock market. The Dow fell below the 30,000 level on Friday, shedding more than 660 points, or 2.2%. The S&P 500 and the Nasdaq fell 2.4% each.
Stubbornly high inflation has forced the Federal Reserve to keep its foot firmly on the brakes, at a time when some investors expected it to begin to ease. The Fed is intentionally slowing down the economy to control inflation. Sharp increases in interest rates and the possibility of more to come increase the risk that the Fed will overshoot and trigger a recession.
“Based on discussions from our clients, most equity investors have adopted the view that a hard landing scenario is inevitable,” Goldman Sachs strategists wrote, “and their focus is on the timing, magnitude and the duration of a possible recession and investment strategies. for that perspective.
Of course, no one knows for sure if there will be a recession. Investors may be too pessimistic and the economy may avoid a recession.
But if there is a recession, Goldman Sachs expects the S&P 500 to continue falling, eventually bottoming out at 3,150. That translates to a further 14% decline from current levels.
Bank of America is warning clients that the market environment is looking more and more like the terrifying days of March 2020, except this time neither the Federal Reserve nor politicians in Washington are coming to the rescue.
One concern is that the full impact of interest rate increases will take months to be felt. That means the Fed may not know it’s overstepped until it’s too late.
“The Fed is hiking at the fastest pace in recent history with the height of uncertainty about the macroeconomic outlook,” Bank of America strategists wrote in a report to clients on Friday. “To us, this looks like driving at 75mph but not knowing which way the road will turn. An accident seems inevitable.