The Wall Street firm said it was likely that at its September meeting the Federal Reserve will lay the groundwork for scaling back its asset purchases before forging ahead with the plan in early 2022. Goldman expects the Fed to each month trim its asset purchases by $10 billion in Treasuries and $5 billion in mortgage-backed securities.
The Fed in March 2020 slashed interest rates to near zero and pledged to buy an unlimited number of assets in order to support the economy through the COVID-19 pandemic. The central bank has since June 2020 been buying a monthly total of $120 billion of Treasury and mortgage securities.
"Tapering sends an important market signal about the timing of liftoff," wrote a Goldman Sachs team led by David Kostin, chief U.S. equity strategist.
Goldman used the 2013 taper tantrum that temporarily roiled markets as a template for what might happen this time around.
The S&P 500 fell 5% during a sharp five-day selloff as the benchmark 10-year Treasury yield climbed 40 basis points to 2.6%. Defensive parts of the markets outperformed riskier areas.
Two months later, the S&P 500 had rebounded by about 5% and ended the year 26% above the taper tantrum’s low point.
The Goldman strategists said the size of the Fed’s balance sheet and the pace of its change have "varying implications" for the stock market’s performance, the former being more important for returns. The firm sees the S&P 500 trading down to 4,300 over the next six months before reaching its 12-month target of 4,450.
Wall Street as a whole is growing more concerned over the possibility of a pullback as the stock market heads into what is typically its weakest two-month stretch of the year.
The S&P 500 has not experienced a correction, or decline of at least 10%, since the selloff that began last August and ended in October. Typically such a decline occurs at least once per year.
Strategists worry the recent emergence of the COVID-19 delta variant and slowing economic growth will serve as headwinds in the coming months.
"There are enough red flags that prudent investors have to start considering de-risking," wrote Scott Minerd, global chief investment officer at Guggenheim Partners.