Goldman Sachs says the risk of stock-market decline has suddenly spiked

Business Insider

4 hours ago

The stock market's hot streak might soon come to an abrupt end, Goldman Sachs said.
In a note to clients, the bank said that its equity asymmetry framework — one of its gauges that assesses stocks based on the market environment and the latest economic data — was sending a signal that the risk for a coming stock market drop had increased.
According to its model, the S&P 500 now faces a higher than 10% chance of a drawdown within the next three months, and more than a 20% chance of a drawdown in the next 12 months, analysts said.
The spike in drawdown risks looks similar to the spike seen during the S&P 500's run-up at the start of the year, the bank said. Goldman's equity asymmetry framework flagged an elevated risk of a drawdown before President Donald Trump announced his slate of tariffs on April 2, which sparked a historic sell-off.
"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," analysts said.
The bank said there were two reasons its model was flashing an elevated risk of a decline:
Volatility in the market is low. The VIX has dropped 71% from its peak on Liberation Day.
The economy is slowing. In order for stocks to do well in a low-volatility environment, the momentum of the economy needs to remain strong. But that looks unlikely, given looming risks stemming from tariffs, the bank said.
Analysts pointed to "worsening business cycle momentum" and recent weakness in the job market, with the US adding fewer jobs than expected in recent months.
The bank also thinks inflation is likely to pick up in the second half of the year as Trump's tariffs continue to work their way through the economy. David Mericle, the chief US economist at the bank, told CNBC on Wednesday that he expected inflation to drift over 3% as the effects of tariffs begin to materialize.
"This is likely to trigger more Fed easing but it could come with more equity volatility in the event of growth concerns, especially if Fed easing disappoints already dovish expectations," analysts said.
Wall Street forecasters have been on high alert for signals of a coming correction as major indexes hover near all-time highs.
The S&P 500 is up 10% year-to-date and 29% since its post-Liberation Day low.