Goldman Sachs sees stocks dropping to this level if a recession strikes
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- The trade war has caused recession fears to spike and stocks to tumble.
- The S&P 500 would drop about 7% from current levels in a full recession, Goldman Sachs estimates.
- "Historical comparisons show that recessions are usually associated with larger equity drawdowns than we have seen."
The stock market has teetered at the edge of a bear market since tariffs were unveiled last week, but investors should brace for deeper losses if a recession strikes.
In a note published on Tuesday, Goldman Sachs analysts said that the S&P 500 would fall as low as 4,600 in a full downturn scenario, based on historical averages. The forecast implies another 7% drop from levels on Wednesday, and a 25% drop from the index's February 19 closing high.
Wall Street is becoming increasingly concerned about a recession. JPMorgan chief Jamie Dimon is the latest among top voices warning of a tariff-induced slowdown, saying this week that a recession is "a likely outcome" amid the deepening global trade war.
Investors are taking note of the possibility, predicting that the Federal Reserve could be forced to cut interest rates to keep the economy running. According to CME FedWatch Tool data, markets expect a 100-basis-point reduction by the end of the year.
As confidence wanes, the market has seen a large chunk of the gains recorded in 2024 vaporized, with the S&P 500 down around 14% in less than a week. With the tariffs now in effect, Goldman said a recession is its baseline forecast.
Yet investors still might not be pricing it in. "We think 200bp of cuts are a reasonable baseline for a recession in the current set-up, and recessionary easing cycles typically begin with at least a 50bp reduction," Goldman said.
Goldman Sachs
"Historical comparisons show that recessions are usually associated with larger equity drawdowns than we have seen and much larger declines in the Fed funds rate than are priced."
Other recession indicators aren't meeting the moment, either. Neither long-dated equity volatility, credit spreads, nor the yield curve have moved meaningfully in response to higher odds of a recession.