Goldman Sachs: Recession Still a Serious Threat Despite Market Rally

The S&P 500 futures have climbed about 18% since hitting a low on April 7, edging closer to a bull market once again. Investors appear to believe the market overreacted to fears surrounding the Trump administration’s trade war, especially after the president paused his proposed “reciprocal” tariffs for 90 days.

But Goldman Sachs isn’t convinced the danger has passed.

Alec Phillips, Goldman’s chief political economist, cautions that President Trump’s recent remarks on a U.K. trade deal indicate higher tariffs could still be coming for many countries. This, he warns, could pose a lasting economic threat.

In a recent podcast titled “On the Precipice of Another Dip?”, Goldman’s chief economist Jan Hatzius and chief global equity strategist Peter Oppenheimer shared a more cautious outlook.

Hatzius estimates a 45% chance of a U.S. recession within the next 12 months. While hard data like payrolls remains strong, soft indicators such as consumer and business sentiment have weakened. He explains that hard data often lags behind, especially when trade activity has been pulled forward to avoid tariffs. “There is a very significant risk of a recession,” Hatzius said.

He also warned that the Federal Reserve may not respond in time. If the Fed waits for clear signs of inflation or labor market weakness, it may be forced into aggressive rate cuts—possibly up to 200 basis points—once a recession is underway.

Oppenheimer added that the recent stock rally was driven by Trump’s easing of tariff threats, solid (though early) corporate earnings, and strong buying from retail investors. But he noted that Q1 earnings don’t yet reflect the impact of recent trade tensions.

“If hard data starts to weaken, particularly in the labor market, markets could quickly refocus on recession risks and pull back,” he said.

He also highlighted concerns about U.S. equity valuations. With the S&P 500 trading at a price-to-earnings ratio of 20, it isn’t cheap. A 10% drop in earnings, typical during a recession, could drive the market lower—possibly toward 4,600.

Adding to the pressure, foreign investors may reduce exposure to U.S. equities as the dominance of large American tech firms declines and the global valuation gap narrows. U.S. stocks currently make up 70% of global market capitalization—a level Goldman believes is unsustainable.

On a more positive note, Oppenheimer doesn’t expect a long-lasting structural bear market, which usually follows asset bubbles or deep financial imbalances. Still, he emphasized that in the short term, stocks face a clear downside risk.