Wall Street will suffer heavy losses if the US economy tips into recession, according to investment bank Goldman Sachs.
The S&P 500 index, a broad measure of corporate America, will shed 19 per cent and close 2022 at 3,150 points if the American economy suffers a tough recession, Goldman said in a note to clients over the weekend.
The index has lost just under 19 per cent so far this year and has dipped in and out of bear market territory – when an index is 20 per cent below its peak.
Concern is growing that the US may already be in the teeth of a slump.
The economy contracted 1.6 per cent over the first quarter, meaning it would tip into a technical recession – two consecutive quarters of contraction – if it shrank in the second quarter.
Similar to the UK, the US is being spiked by the steepest inflation spike in four decades, with prices accelerating 8.6 per cent over the last year.
Higher living costs are piling pressure on household finances and businesses’ bottom lines, weighing on economic activity.
A rapid rate rise cycle launched by the US Federal Reserve to tame prices, which saw the central bank lift borrowing 75 basis points for the first time since 1994 last month, is adding to the squeeze on the economy.
New stateside figures published this Wednesday are expected to show elevated inflation persisting.
Goldman said financials would be hit hard by an economic reversal.
There is “potential for [earnings per share] declines of 70 per cent [for banks] depending on reserve builds and the path of rates,” the investment bank said.
The warning comes as US lenders’ earnings season kicks off this week when Morgan Stanley and JP Morgan update markets on Thursday.
US banks’ bottom lines are likely to have been hit by the Russia-Ukraine war and greater global economic uncertainty sending a chill through deal making activity.
Goldman warned that “if inflation concerns were to limit the degree of monetary or fiscal policy support, a recession could lead to even larger economic and earnings growth declines”.
Even in their most likely scenario, in which the US economy avoids a recession, Goldman think earnings per share will grow at a below consensus rate of eight per cent.