S&P 500 to drop 22% in recession - Goldman Sachs

Black market bear on financial chart background

In the event of a recession, Goldman Sachs anticipates that the S&P 500 will experience a decline of over 20%.

There is a 25% chance of an economic downturn occurring within the next 12 months.

Goldman Sachs has identified numerous factors that could potentially limit the gains of the S&P 500 rally.

According to Bloomberg, Goldman Sachs has forecasted that the S&P 500 could drop by 22% to 3400 points if the US economy enters a recession. The bank has cited several stock market indicators in its prediction.

Option positions that are bullish appear to be overly abundant, the increase in stock prices has been limited, stock values are too high and are trading at 19 times the price-to-earnings ratio, and the current stock prices already reflect overly optimistic projections of economic growth.

It is historically seen that when the share price-to-earnings ratio of S&P 500 companies is high, it usually leads to a 14% decrease in the value of the stocks over the course of the following year.

Goldman Sachs strategists said that there is a 25% chance of a recession occurring in the next 12 months, and if this possibility increases, the S&P 500 could fall to 3,400.

Despite the experts' advice to hedge against a potential recession in the stock market, the bank's forecast is for the S&P 500 to increase by 7% to 4,700 over the next year, indicating that the rally in large-cap stocks is still going strong.

Year-to-date, the S&P 500 has risen 14%, and since its October 12, 2022 low, it has increased by 22%. In early June, the index surpassed the 20% threshold from its low, entering a bull market.

Research conducted by Bank of America has revealed that 92% of the time, the S&P 500 will experience an increase in value within 12 months of entering a bull market. Nevertheless, the growth of stocks can be unpredictable and not follow a linear pattern.

Detrick, the chief market strategist at Carson Group, believes that the S&P 500 will increase by an average of 10% over the next six months and 17.7% over the next 12 months, following its 20% rise from its lows.

Despite some optimism on Wall Street, Morgan Stanley predicts that corporate income will decrease by 16% by the end of 2023 due to high Federal Reserve rates and the potential for a recession in the US. This could have a negative impact on stocks, making them less appealing to investors.