Goldman Sachs warns of more trouble ahead for US stocks


New York
CNN

Goldman Sachs is also succumbing to the gloomy mood on Wall Street, abandoning its previously optimistic stance and warning that US stocks will end the year deep in the red.

Goldman Sachs ( GS ) took an ax to its stock market outlook late Thursday, cutting its year-end S&P 500 target to 3,600 from 4,300. This assumes a further 2% decline from current levels and no sustained rebound.

Worse, the Wall Street bank has warned of even more trouble for stocks in a potential recession and admits the risks to its outlook are on the downside.

“The outlook is unusually bleak,” Goldman Sachs strategists wrote in the report. “The forward paths of inflation, economic growth, interest rates, earnings and valuations are changing more than usual with a wider spread of outcomes.”

In other words, no one knows exactly what will happen.

This uncertainty is contributing to the ongoing selloff in the stock market. The Dow fell below 30,000 on Friday, losing more than 660 points, or 2.2%. The S&P 500 and Nasdaq each fell 2.4%.

Strong inflation has forced the Federal Reserve to keep the brakes firmly on the brakes – just as some investors had hoped it would begin to loosen. The Fed is deliberately slowing the economy to keep inflation under control. Sharp interest rate hikes and the possibility of more to come increase the risk of the Fed overshooting and triggering a recession.

“Based on discussions with our clients, most equity investors believe a hard landing scenario is inevitable,” Goldman Sachs strategists wrote, “and their focus is on the timing, magnitude and duration of the downturn and their investment strategies. Because of that view.”

Of course, no one knows for sure whether there will be a recession. Investors may be too pessimistic and the economy will avoid a downturn.

But if there is a recession, Goldman Sachs expects the S&P 500 to continue to slide, eventually reaching 3,150. This represents a further decline of 14% from the current level.

Bank of America is warning clients that the market environment is increasingly feeling like the dreaded days of March 2020, this time neither the Federal Reserve nor politicians in Washington will come to the rescue.

One concern is that it takes months for the full impact of interest rate increases to be felt. This means the Fed may not know it has overdone it until it is too late.

“The Fed is tightening at its fastest pace in recent memory with the greatest uncertainty about the macro outlook,” Bank of America strategists wrote in a report to clients on Friday. “For us, it’s like driving at 75 mph, but not knowing which direction the road will take. An accident seems inevitable.’