Most economists are predicting a recession in the United States within the next year, along with stagnant company earnings growth in 2023. However, Goldman Sachs has a more positive outlook.
According to a poll conducted by the Wall Street Journal, economists forecasted a 54% chance of a recession in the next 12 months. Yet, Goldman Sachs recently lowered this probability from 25% to 20%.
Goldman Chief Economist Dismisses Recession Concerns
Jan Hatzius, the chief economist at Goldman Sachs, provided several reasons for their optimism during a panel discussion. Hatzius highlighted the strong labor market and a rebound in real disposable personal income growth as positive indicators. He also noted that monetary policy is causing less of a drag on the economy.
In addition, Hatzius believes that U.S. inflation will decline without necessitating a recession. He pointed out that inflation has already decreased significantly without a recession; the annual rate of consumer price index increase dropped from over 9% to 3% in June.
Deceleration Expected in Various Sectors
Hatzius expects deceleration in sectors such as used cars, rent, and certain labor-sensitive parts of the services industry. This outlook aligns with the experiences of emerging market economies like Brazil, Chile, Poland, and Hungary. These countries, which tightened monetary policy more quickly than the U.S., have witnessed a significant deceleration of inflation in recent months.
The chief economist believes that this trend indicates positive prospects for the U.S. and other advanced economies.
Optimistic Earnings Outlook
Goldman Sachs is also more optimistic about U.S. company earnings compared to market consensus. While analysts expect a high-single-digit percentage decline in second-quarter earnings, Sharmin Mossavar-Rahmani, the head of Goldman Sachs’ investment strategy group, anticipates a more positive outcome.
Despite the gloomy predictions from many economists, Goldman Sachs remains confident in the strength of the U.S. economy and its ability to weather potential challenges. Earnings per Share Showing Growth, but a Slowdown Ahead
For the 10% of U.S. companies that have already reported their second-quarter results, their earnings per share grew an average of 10%. However, experts predict that this pace is unlikely to continue. Analysts expect a decline of 1% to 2% in the coming months, mainly driven by the energy sector due to the significant drop in energy and crude oil prices.
Looking ahead to 2023, Goldman Sachs forecasts that earnings will rise by 4% to 6%, while the market consensus is a more modest 0.5%.
China’s Economic Challenges and Global Impact
In terms of China, experts assert that the country’s economy will face significant headwinds, which will also affect countries heavily reliant on China for exports. The pillars of growth in the Chinese economy, including the property sector, infrastructure, investment, and exports, are no longer sustainable. Additionally, China grapples with great policy uncertainty.
Nevertheless, analysts believe that these challenges in the Chinese economy will not have a material impact on U.S. companies’ earnings. The exposure of U.S. companies to emerging markets, including China, is relatively small compared to their overall operations. The impact is forecasted to be much greater in Europe, rather than in the United States.
Given this analysis, experts recommend an overweight position on U.S. equities and an underweight position on emerging markets.
Mixed Trading in U.S. Stocks
On Thursday, U.S. stocks experienced mixed trading. The Dow Jones Industrial Average saw a modest increase of 0.6%, while the S&P 500 and the Nasdaq Composite declined by 0.6% and 1.8%, respectively.