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Stock market not factoring in potential recession, Goldman Sachs warns

National Retail Federation CEO Matt Shay provides an analysis of the retail sector as consumers prepare for the holiday shopping season on ‘Cavuto: Coast to Coast.’

The stock market could face further volatility next year as it has not yet priced in the likelihood of a recession, according to Goldman Sachs strategists. 

In a Monday analyst note, the strategists – led by Christian Mueller-Glissmann and Cecilia Mariotti – said there is a 39% probability of a growth slowdown in the U.S. over the next 12 months. Despite that, risk assets are only reflecting an 11% chance.

"This increases the risk of further recession scares next year," they wrote. 

The analysis showed that equities typically rebound once inflation has peaked if the economy avoids a recession. If the U.S. enters a downturn though, stocks could decline another 10% on average in the six to nine months after the peak. 

ECONOMIC INDEX FLASHES MAJOR RECESSION WARNING SIGN

US stock market

Traders work on the floor of the New York Stock Exchange (NYSE) on June 10, 2022 in New York City. (Photo by Spencer Platt/Getty Images) ((Photo by Spencer Platt/Getty Images) / Getty Images)

"The bear market is not over, in our view," they wrote. "The conditions that are typically consistent with an equity trough have not yet been reached. We would expect lower valuations (consistent with recessionary outcomes), a trough in the momentum of growth deterioration, and a peak in interest rates before a sustained recovery begins."

A separate Goldman analyst note last week from strategists Peter Oppenheimer and Sharon Bell predicted the bear market will continue into 2023, with the S&P finishing the year at 4,000 index points – up just 0.9% from Monday afternoon. 

"The bear market is not over, in our view," they wrote. "The conditions that are typically consistent with an equity trough have not yet been reached. We would expect lower valuations (consistent with recessionary outcomes), a trough in the momentum of growth deterioration, and a peak in interest rates before a sustained recovery begins."

Grocery store inflation

Shoppers walk through the milk and cream section of a supermarket in Montebello, California, on August 23, 2022. ((Photo by FREDERIC J. BROWN/AFP via Getty Images) / Getty Images)

DEMOCRATS SLAM 'DANGEROUS' FED RATE HIKES, WARNING OF WIDESPREAD JOB LOSSES

Despite a slight deceleration in consumer prices last month – inflation rose 7.7% annually, the slowest pace since January – there is still a growing consensus on Wall Street that the Fed will trigger a recession as it raises interest rates at the fastest pace in decades.

Officials this month approved a fourth consecutive 75-basis-point rate hike, lifting the federal funds rate to a range of 3.75% to 4% – near restrictive levels – and showed no signs of pausing rate increases.

close Economists Austan Goolsbee and Kevin Hassett weigh in on the current rate of inflation on 'WSJ at Large.' video

Austan Goolsbee: The decrease in inflation ‘might not be as rapid as everyone wants’

Economists Austan Goolsbee and Kevin Hassett weigh in on the current rate of inflation on ‘WSJ at Large.’

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"Let me say this," Fed Chairman Jerome Powell told reporters on Nov. 2. "It is very premature to be thinking about pausing. When people hear lags, they think about pauses. It's very premature, in my view, to talk about pausing our rate hikes. We have a way to go."

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