Goldman strategists warn S&P could drop another 11% if recession hits

Market expert warns to ‘watch out’ for inflation through 2024

Research Affiliates founder and Chairman Rob Arnott gives his market outlook amid 40-year high inflation.

The S&P 500 has gotten crushed in a widespread sell-off this month, and the benchmark index is likely to tumble even lower if the economy falls into a recession, according to Goldman Sachs analysts. 

In a recent analyst note, Goldman Sachs lowered its year-end price projection for the S&P for the third consecutive time to 4,300 – which is actually a potential 8% upside to current levels, though down 10% from the start of the year. Goldman initially forecast that the S&P would close out the year at 5,100. 

INFLATION SOARS 8.3% IN APRIL, HOVERING NEAR 40-YEAR HIGH

But the outlook is much bleaker if the economy is dragged into a recession this year: Goldman projected the S&P would fall close to 11% from the benchmark's current level, finishing the year around 3,600. That would mark a steep, 25% decline from the beginning of the year. 

The U.S. economy’s growth is likely slowing as 2020 comes to a close, but a growing number of economists expect it to claw back to its pre-pandemic strength by the second half of next year.  (AP Photo/Mark Lennihan / AP Newsroom)

The index has already plunged in recent weeks as concerns over sky-high inflation, rising interest rates and a darkening economic outlook continue to weigh on the market.

Since the start of the year, the benchmark S&P has dropped more than 16%, nearing bear market territory. The last time the S&P entered a bear market was in March 2020 at the start of the COVID-19 pandemic. 

The analysis comes one week after the Labor Department reported inflation surged higher than expected in April, with prices rising 8.3%, close to a 40-year high. Economists had been hoping for signs that the inflation spike was subsiding in a substantive way; instead, the report underscored how strong inflationary pressures still are in the economy. 

The report is likely to provide little comfort to the Federal Reserve, which faces the tricky task of cooling demand and prices without inadvertently dragging the economy into a recession. Policymakers raised the benchmark interest rate by 50 basis points earlier this month for the first time in two decades and have signaled that more, similarly-sized rate hikes are on the table at coming meetings as they rush to catch up with inflation. 

In this Jan. 29, 2020 file photo, Federal Reserve Chair Jerome Powell pauses during a news conference in Washington. (AP Photo/Manuel Balce Ceneta, File / AP Newsroom)

There are growing fears that the Fed will trigger a recession. Hiking interest rates tends to create higher rates on consumer and business loans, which slows the economy by forcing employers to cut back on spending. Bank of America, as well as Fannie Mae and Deutsche Bank, are among the Wall Street firms forecasting a downturn in the next two years.

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Fed Chairman Jerome Powell has acknowledged there could be some "pain associated" with reducing inflation and curbing demand but pushed back against the notion of an impending recession, identifying the labor market and strong consumer spending as bright spots in the economy. Still, he has warned that a soft landing – the sweet spot between cooling demand with crushing it and triggering a recession – is not assured. 

"It will be challenging, it won’t be easy. No one here thinks that it will be easy. Nonetheless, we think there are pathways … for us to get there," Powell said during an interview last week with Marketplace.

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