MW Stocks are at a risk of a drop of nearly 20%, says Goldman Sachs. Here's the trigger.

By Jamie Chisholm

Recession is a big risk for this market, says the bank

S&P 500 futures have risen about 18% since diving to an intra-session low on April 7. A couple more decent days and they'll be registering a bull market again.

Traders clearly reckon the stock market overacted a month ago to the potential damage the Trump trade war may cause. Trump's 90-day pause on his "reciprocal" tariff plan was a significant help in that regard.

But Goldman Sachs remains concerned.

The bank's chief political economist Alec Phillips has just warned that the U.S President's comments surrounding the trade deal with the U.K. suggest many countries ultimately will face notably higher tariffs than they did before Trump's re-election.

And in a podcast published on Thursday entitled, "On the precipice of another dip?" Goldman's chief economist Jan Hatzius and chief global equity strategist Peter Oppenheimer appeared notably cautious.

Hatzius reiterated that he sees a 45% chance of a U.S. recession in the next 12 months. He acknowledges that data of late has been mixed with weak soft data, like sentiment surveys, but better hard data, such as the latest payrolls numbers.

That can be reconciled because history shows hard data lags, usually by 60-days or so, he notes, though this time the lag may be longer because much trade commerce was brought forward to beat tariffs. Still, there is "a very significant risk of a recession," says Hatzius.

With the Federal Reserve being forced to wait and see if the tariffs deliver a one-off price bump or more sustained inflationary pressure, it may only be triggered into easing policy when the labor market has already started to deteriorate. A recession may then see the Fed deliver 200 basis points of rate cuts from here, according to Hatzius.

Oppenheimer says the recent strong rebound for stocks came as traders welcomed Trump's pullback from his initial punitive tariffs; cheered earnings that have been "reasonably decent"; and saw retail investors strongly buying the dip.

However, Oppenheimer notes that first-quarter earnings don't cover the period since the tariff turmoil kicked in.

"If the hard data begins to deteriorate, particularly the U.S. labor market, I think the market will put a much more significant weight on a potential recession, and the market could well fall back from these levels, and that would be our central view," says Oppenheimer.

"Bear in mind the U.S. market is back to a PE [price to earnings multiple] of 20...so it's not particularly cheap," he adds. A 10% fall in earnings in a typical recession may cause the market also to be valued on a lower than average PE, taking the S&P 500 SPX down to 4,600, he says.

The pressure on U.S. stocks will be exacerbated by foreign investors reducing their exposure to Wall Street as the advantages of American big tech companies are whittled away, and the market narrows the record wide valuation differentials that have for 15-years been benefiting the U.S. The U.S accounts for a record 70% of global stock market valuation and that is likely to fall.

The good news is that Oppenheimer does not think we are facing a structural bear market, which is often preceded by massive asset bubbles and private sector imbalances, such as Japan in the late 1980s, and the financial crisis around 2007/8. Such bear markets tend to be much deeper, with falls of around 60% and take place over a longer period than, say, an event-driven bear market, like we have just witnessed.

Nevertheless, Oppenheimer stresses that there is an asymmetric risk to the downside for stocks in the short term.

Markets

U.S. stock-index futures (ES00) (YM00) (NQ00) are a bit higher as benchmark Treasury yields BX:TMUBMUSD10Y trade little changed. The dollar index DXY is lower, while oil prices (CL.1) rise and gold (GC00) is trading around $3,328 an ounce.

   Key asset performance                                                Last       5d     1m      YTD      1y 
   S&P 500                                                              5663.94    1.07%  7.51%   -3.70%   8.63% 
   Nasdaq Composite                                                     17,928.14  1.23%  9.40%   -7.16%   9.68% 
   10-year Treasury                                                     4.388      7.40   -10.60  -18.80   -11.40 
   Gold                                                                 3332.7     2.60%  4.34%   26.27%   41.63% 
   Oil                                                                  60.66      2.85%  0.70%   -15.60%  -23.77% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

There's a flurry of Federal Reserve officials making comments, including New York Fed President John Williams at 8:30 a.m. Eastern; Chicago Fed President Austan Goolsbee at 10 a.m.; and Fed Governor Christopher Waller and New York Fed President John Williams on a panel at 11:30 a.m.

China's exports to the U.S. fell 21% in April compared with the previous year, but rose sharply to Europe and Asia, data released Friday showed.

Expedia shares are down 9% in premarket action after the online travel agency delivered bigger net losses and guided for weaker demand in the current quarter.

International Consolidated Airlines (UK:IAG), parent of British Airways and Iberia, said Friday that it has ordered 32 jets from Boeing $(BA)$ , confirming hints of such a deal made by Commerce Secretary Howard Lutnick.

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The chart

U.S. officials will meet with Chinese counterparts in Switzerland this weekend to address the trade war between the world's two biggest economies. This chart from Spencer Hakimian, founder of Tolou Capital Management, shows why a ratcheting back of rhetoric, at the very least, should be expected.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   GME     GameStop 
   PLTR    Palantir Technologies 
   MSTR    Strategy 
   TSM     Taiwan Semiconductor Manufacturing 
   AAPL    Apple 
   AMD     Advanced Micro devices 
   QBTS    D-Wave Quantum 
   AMZN    Amazon.com 

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-Jamie Chisholm

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May 09, 2025 06:53 ET (10:53 GMT)

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