Goldman Downgrades US GDP Forecast, Predicts More Downside Risk for S&P 500

A view of the Goldman Sachs stall on the floor of the New York Stock Exchange in New York City on July 16, 2013. Brendan McDermid/Reuters

Investment banking giant Goldman Sachs has trimmed its forecast for U.S. economic output in 2022, predicting growth will stall early in the year due to fading fiscal support and the impact of the Omicron variant.

Goldman has cut its U.S. GDP forecast for all of 2022 to 3.2 percent from a previous projection of 3.8 percent, according to a note cited by Reuters.

Analysts at the investment bank downgraded their prediction for first-quarter GDP to 0.5 percent from 2.0 percent, citing a sharp reduction in spending on services starting in early December 2021 as the fast-spreading Omicron grabbed headlines.

ING analysts, meanwhile, see a “real chance” that first-quarter GDP in the United States will turn negative.

“With January consumer spending unlikely to show meaningful improvement on December, we are pencilling in flat consumer spending growth for the quarter even though spending should be much stronger in February and March,” the analysts wrote in a note.

Still, they predict a “very strong return to vigorous growth” in the second quarter of 2022, driven by a strong jobs market, accumulated savings, and falling COVID-19 infection numbers sparking hope that spending will pick up as consumers “re-engage with the economy” toward the end of the first quarter.

American shoppers pulled back on spending in December 2021, with the Commerce Department reporting last week that consumer spending fell 0.6 percent that month. Consumer spending is a key driver of the U.S. economy, accounting for around two-thirds of GDP.

Separately, Goldman Sachs strategist David Kostin was cited by Bloomberg as saying he sees risks “tilted to the downside” to his forecast for the benchmark S&P 500 equities index to hit 5,100 points by the end of 2022.

Economists at UBS have charted three alternative scenarios for the S&P 500, depending on the Fed’s path of monetary policy normalization and what happens with the Russia–Ukraine tensions.

UBS analysts’ base case is for the index to hit 5,100 points by year’s end on the assumption that the Russia–Ukraine situation will stabilize and inflation will stay cool enough to avoid more aggressive tightening on the part of the Fed than the four or five rate hikes markets have priced in.

“We do not think this amount of rate hikes would derail economic growth. We forecast only a modest further rise in US 10-year yields—to 2 percent by June and 2.1 percent by the end of the year. Our base case for the Russia-Ukraine situation is for an eventual stabilization and easing of tensions,” UBS analysts wrote the Jan. 30 note.

A pessimistic projection involves inflation running hotter than expected and fears about rising prices forcing the Fed to hike more aggressively, a scenario that would tee up the S&P 500 for 4,100 points by the end of the year. If Russia–Ukraine tensions were to escalate and cause a commodity price shock, and a recession were to ensue, UBS projects a lower range of between 3,400 and 3,700 points for the benchmark index.

“A bull case may seem hard to envisage at such a turbulent time for equity markets, but if inflation starts to retreat, markets could go back to viewing the Fed as flexible and responsive to financial conditions,” UBS analysts wrote.

“Historically, markets have performed well during hiking cycles if growth remains robust. In this more benign scenario, we would expect the S&P 500 to finish the year at 5,300.”

Reuters contributed to this report.