Goldman’s Stagflationary Vibe Sees It Cut S&P 500 Target Again and Hike Recession Risk

As we enter a new quarter, traditional investors must brace themselves for troubling signals from the financial landscape, brought to us by the economic behemoth Goldman Sachs. In a recent note, the firm has slashed its S&P 500 target for the coming months and increased forecasts for recession risk, stirring unease among conservative market watchers. With the April 2 tariff deadline fast approaching, the reverberations of government interference in our economy are becoming impossible to ignore.

Why the Downgrade?

Goldman Sachs’ equity strategists, led by David Kostin, have revised their outlook for the S&P 500, lowering their forecast from a stable position to a 5% downturn, now targeting around 5,300. While they maintain a somewhat optimistic view for the longer term—projecting the S&P at 5,900 in twelve months—this stands as a stark decline from an earlier projection of 16% increase. The rationale for this shift is abundantly clear: the specter of stagflation is looming large, exacerbated by ongoing tariff pressures.

Stagflation: The New Reality?

The term “stagflation” isn’t just economic jargon; it describes a lethal combination of stagnant economic growth and soaring inflation. With President Trump’s upcoming “reciprocal” tariffs set to materialize on April 2, Goldman Sachs has been forced to revise its import tariff expectations from a 10 to a staggering 15 percentage points. This spike in tariffs is expected not only to hike consumer prices but also to take a significant toll on economic activity.

Goldman’s economic team, led by Jan Hatzius, has revised its year-end core Personal Consumption Expenditure (PCE) inflation forecast up by 0.5 percentage points to 3.5%. They now predict U.S. GDP growth for 2025 will drop to a meager 1.0%, with a quarterly tracking estimate for Q1 plummeting to only 0.2%. Most concerning is an increase in their forecast for recession likelihood from a previous 20% to 35%. This reflects a sobering reality: household and business confidence is declining, and government officials seem increasingly willing to tolerate economic weakness in the pursuit of their policies.

Lower Earnings Forecasts and Valuation Risks

In a domino effect stemming from decreased optimism, the Kostin team has slashed their S&P 500 earnings per share growth target for 2025 by a whopping 57%, landing it at just 3%. EPS growth forecasts for 2026 have also been reduced from 7% to 6%. Notably, just three weeks ago, Goldman adjusted its EPS target for the current year from $262 to an alarming $253.

It’s crucial to understand the implications of these downgrades, as the current uncertainty around the market signifies a higher equity risk premium. The S&P 500’s price-to-earnings (P/E) multiple has already declined from 21.5 early this year to a current 20, with projections suggesting it may drop further to around 19. Goldman predicts that with current consensus EPS estimates unchanged, the P/E ratio could fall to 19x in three months and modestly increase to 19.5x in 12 months.

Be Prepared for More Volatility

For investors navigating this turbulent landscape, it’s vital to remain alert. History has shown that in times leading up to recessions, the S&P 500 often experiences significant declines, averaging around 25%. If we apply this historical precedent to the last record high of 6144 in February, we could be looking at a further 17% downturn, bringing the index down to approximately 4600. This is a sobering reminder that complacency in investing can lead to severe financial consequences.

Conclusion

As we stride further into 2025, the message from Goldman Sachs serves as a crucial wake-up call. With tariff-induced inflation and stagnant growth set to ravage corporate profits, traditional investors must evaluate their strategy carefully. Ignoring the signs of a looming recession is no longer an option; prudence and proactive management of investment portfolios must take precedence in these uncertain times. As always, sticking to fundamental financial principles and resisting the temptations of speculation will be key to weathering the upcoming storm.