The stock market has gotten obliterated in a widespread selloff this month, and equities are likely to see further losses before the Federal Reserve signals that the conclusion of monetary tightening, according to Goldman Sachs strategists.
In an analyst note this week, Goldman strategist Vickie Chang said the stock selloff may not reach bottom until policymakers at the central bank signal they are finished with raising interest rates — something that may not happen until a recession is imminent.
"It may be necessary for the market to become more confident than it is that financial conditions tightening has been sufficient and that the Fed has delivered and signaled enough tightening," Chang said in a note on Monday. "Monetary policy has historically stopped tightening about three months before equities bottom, and shifted to easing about two months afterwards."
The S&P has already tumbled a little more than 18% this year, and briefly slid into bear market territory on Friday afternoon for the first time since March 2020, at the start of the COVID-19 pandemic.
So far this year, the benchmark index has been down for seven consecutive weeks, its worst stretch since the dot-com bubble burst in 2001, as high inflation, rising interest rates and the risk of a recession rattles investors.
The Nasdaq Composite, meanwhile, is already deep into its own bear market, while the Dow Jones Industrial Average has also plunged for nine consecutive weeks.
"A shift to Fed easing is unlikely without a clear move into recession, but — as in late 2018 — a clear signal that tightening risks are receding may be sufficient," Chang said in the note.
There are growing fears on Wall Street that the Fed may inadvertently trigger a recession with its war on inflation, which climbed by 8.3% in April, near a 40-year high. Other firms forecasting a downturn in the next two years include Bank of America, Fannie Mae and Deutsche Bank. Subramanian put the odds of a recession around 40%.
Economic growth in the U.S. is already slowing. The Bureau of Labor Statistics reported earlier this month that gross domestic product unexpectedly shrank in the first quarter of the year, marking the worst performance since the spring of 2020, when the economy was still deep in the throes of the COVID-induced recession.
Fed policymakers already raised the benchmark interest rate by 50 basis points earlier this month for the first time in two decades and have signaled that more, similarly sized rate hikes are on the table at coming meetings as they rush to catch up with inflation. Chairman Jerome Powell recently pledged that officials will "keep pushing" until inflation falls closer to the Fed's 2% target.
Still, he has acknowledged there could be some "pain associated" with reducing inflation and curbing demand but pushed back against the notion of an impending recession, identifying the labor market and strong consumer spending as bright spots in the economy. Still, he has warned that a soft landing is not assured.
"It's going to be a challenging task, and it's been made more challenging in the last couple of months because of global events," Powell said last week during a Wall Street Journal live event, referring to the Ukraine war and COVID lockdowns in China.
But he added that "there are a number of plausible paths to having a soft or soft-ish landing. Our job isn't to handicap the odds, it's to try to achieve that."