Why Goldman Sachs Is Increasingly Confident In Dodging Recession, Contrary To Wall Street Consensus

Goldman Sachs’ U.S. economist, Jan Hatzius dialed down the U.S. recession risk further in a Tuesday note. The latest insights from the investment giant reveal the 12-month U.S. recession probability now stands at a mere 15%, down 5 percentage points from their previous estimate.

Goldman Sachs’ unwavering optimism in the U.S. economy’s resilience has been a talking point on Wall Street over the past year. While others have been cautious, if not bearish, Goldman Sachs has remained firmly in the bull camp. The contrast between Goldman Sachs’ 15% U.S. recession probability and the Bloomberg consensus, which indicates a 60% likelihood of recession, is now striking.

The US Economy’s Wildcard: Strong Fundamentals

Goldman Sachs points to several factors supporting their rosy outlook. They anticipate a resurgence in household real disposable income by 2024, driven by robust job growth and increasing real wages.

Furthermore, Hatzius stated that he strongly disagrees with the assumption that an increasing and prolonged drag from high interest rates will force the economy into recession.

Despite a slight uptick in unemployment to 3.8% in August, Goldman Sachs remains unfazed. They attribute this rise to an increase in labor force participation and emphasize that key employment indicators remain strong.

Goldman Sachs anticipates the Federal Reserve to take a measured approach. On the one hand, they think that they are done with rate hikes. On the other, they acknowledge that swift interest rate cuts are unlikely unless economic conditions worsen significantly. The bank projects only a gradual rate cut cycle starting in Q2 2024.

Quandary For Investors

In the wake of Goldman Sachs’ positive stance on the economy, investors are left pondering their investment strategies.

The equity and credit strategists at the investment bank suggest that the era of strong stock market gains may have peaked.

“Equity markets have lost momentum in the last month despite the positive economic news.”

Analysts at Goldman Sachs believe that both investment-grade (IG) and high-yield (HY) bonds will offer excess returns in the upcoming period.

U.S. IG bonds are tracked by the iShares iBoxx $ Investment Grade Corporate Bond ETF LQD, while HY bonds are tracked by iShares iBoxx $ High Yield Corporate Bond ETF HYG.

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