Goldman Sachs has revealed that there’s a high chance the stock market could reverse in the coming months due to economic uncertainty. The bank also referred to its equity asymmetry framework, which indicated that the risk of a drop in the stock market had increased.
The financial institution uses the equity asymmetry framework to measure stocks based on the market environment and the latest economic data. The analysts said the model showed that the S&P 500 has a higher than 10% chance of a drawdown within the next three months.
CBOE volatility index plummets more than 70% from January’s peak
The stock market index, which tracks the stock performance of 500 leading companies listed on U.S. stock exchanges, also showed a more than 20% chance of a market downturn in the next 12 months. Goldman Sachs analysts said they mirrored the spike in drawdown to the previous spike seen during the S&P 500’s rally in January.
The bank’s equity asymmetry framework showed a higher chance of a drawdown before President Trump announced his flurry of tariffs on April 2. At the time, the S&P 500 followed a historic sell-off as forecasted by the analysts.
“The equity drawdown probability is elevated and has increased recently. Usually levels above 30% give a signal for downside risk to equities, and current levels are nearing those.”
-David Kostin, Chief U.S. Equity Strategist in Goldman Sachs Research.
The financial institution also attributed two main reasons as to why its model was indicating an elevated risk of a downturn. It noted that market volatility was low. The Chicago Board Options Exchange’s (CBOE) Volatility Index (VIX) plummeted by more than 70% from its peak on Liberation Day.
Goldman Sachs analysts also noted that the economy is slowing. They argued that the momentum of the economy needs to remain strong for stocks to thrive in a low-volatility environment. They also concluded that it seemed unlikely due to the heightened risks stemming from U.S. tariffs.
The bank’s analysts also pointed to recent weakness in the job market as an indicator of a weaker economy. The U.S. has added fewer jobs than expected in recent months.
Goldman Sachs analysts expect a spike in inflation in H2
Goldman Sachs expects inflation to rise in the second half of the year due to the continued uncertainty of Trump’s trade policies. David Mericle, the chief U.S. economist at the bank, mentioned on Wednesday that he expects inflation to surge above 3% as the effects of U.S. levies begin to materialize.
The bank has been on high alert for signals of a coming correction as major U.S. indexes hover near all-time highs. The S&P’s 500 has surged 10% YTD and 29% since its post-Liberation Day low.
The analysts believe that rising inflation could trigger more Fed easing. They argued that central bank easing could come with more equity volatility in the event of growth concerns, especially if it disappoints already dovish expectations.
As previously reported by Cryptopolitan , Wednesday’s inflation data for July came in 0.2% higher for the month and 2.7% from a year earlier. The data caused a spike in market expectations for Fed easing in the second half of the year.
The CEM Group’s FedWatch tool showed higher probabilities for interest rate cuts at the three upcoming Federal Reserve meetings for 2025. At the time, the tool showed a more than 98% chance of a 50-basis-point cut in the September meeting.
Thursday’s producer prices showed the quickest rise in three years in July amid a surge in the costs of goods and services, which immediately wiped out expectations of a rate cut.
The data pointed to a rise in inflationary pressure, which poses a dilemma for the U.S. central bank. CME’s FedWatch tool indicated a slight pullback in the chances of a 25-basis-point cut by the Fed, currently at 93.1%.
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