The CEO of Goldman Sachs (GS), David Solomon, expects the price slide on the stock markets into 2023 and believes there is about a 2 in 3 chance of a recession hitting the US economy.
Speaking at the Wall Street Journal’s CEO Council Summit on Tuesday, Solomon said he expects stocks to fall along with oil and real estate (both commercial and residential) while the U.S. dollar is likely to rise slightly next year .
Meanwhile, Solomon put the probability of a “soft landing” — or a slowdown in inflation that doesn’t plunge the economy into recession — for the US economy at just 35%.
“I would define a soft landing if we get inflation back to close to 4%, maybe we have a 5% terminal rate and 1% growth,” Solomon said. “I think there’s a reasonable possibility that we can navigate such a scenario.”
“But I also think there’s a very reasonable possibility that we could have some kind of recession,” Solomon added.
Goldman Sachs Chairman and CEO David Solomon speaks during the Milken Institute Global Conference on May 2, 2022 in Beverly Hills, California. (Photo by Patrick T. FALLON/AFP) (Photo by PATRICK T. FALLON/AFP via Getty Images)
Solomon’s personal view reflects far less optimism than the consensus forecasts of his firm’s economists, who expect the US economy to “nearly avoid” a recession and stocks to end flat next year.
The company’s equity strategy team, led by David Kostin, said in its full-year outlook released last month that it expects the S&P 500 to end 2023 at 4,000 points. The benchmark index closed at 3,941 on Tuesday.
When asked about the 10-year Treasury yield in a Q&A at the end of his interview, Solomon said his view hinged on whether or not an economic downturn could be avoided.
“Rather than give you a number, if you listen to my opinion, we have a yield curve that when it normalizes — if you get that soft landing — the 10-year Treasury yield is going to see higher,” Solomon said. “If you don’t get that soft landing, you’re going to see a policy reversal, and then you can see the same or lower interest rates.”
Solomon says it’s not surprising to be in a period of higher interest rates as the Federal Reserve seeks to curb inflation fueled by extensive fiscal stimulus and the “black swan” impact of the war in Eastern Europe.
The story goes on
“The market assumes that we will reach the terminal rate sometime soon [Fed] rates will come back down, and if you look at most tightening cycles historically, after a while you see a reversal,” Solomon said. “But I think we’re just getting started — I think it’s uncertain.”
Goldman Sachs forecasts that the Federal Funds Rate will peak in the middle of next year at 5% to 5.25%.
However, the investment bank’s economists do not expect the Federal Reserve to start cutting interest rates in 2023.
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Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc
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