Earnings reports indicate robust performances, and the US economy appears to be on solid footing, fostering a sense of optimism among investors. In light of recent tame inflation rates, expectations for Federal Reserve interest rate cuts have intensified, leading major stock indexes to reach new heights this week. However, Goldman Sachs has issued a cautious note regarding potential risks that could undermine this seemingly favorable market environment.
In their analysis, Goldman Sachs outlined two main risks that could pressure stock prices: concerns about a possible recession and shifting expectations surrounding Fed rate cuts. The current market dynamics suggest that, while economic growth remains strong, there are notable weaknesses, particularly in the job market, that could influence the Fed’s decision-making.
Goldman’s strategists emphasized that the recent rally in stock prices has largely been driven by hopes of forthcoming rate cuts, given the current economic indicators. Yet, they warned that this optimism may be overly complacent, particularly as the job market shows signs of softening. Although the unemployment rate is at a historic low, job growth has been disappointing in recent months, with the US Labor Department revising estimates to show the addition of 911,000 fewer jobs than previously thought for the period from April 2024 to March 2025.
The strategists pointed out that if the unemployment rate begins to rise sharply, market sentiments could quickly shift. “The quickest way for the market to worry that it has misjudged the limited nature of near-term economic weakness is a sharper rise in the unemployment rate,” they noted, emphasizing that this scenario could lead to expectations of sooner-than-anticipated rate cuts, potentially exerting downward pressure on equities.
On the other hand, if the US economy continues to demonstrate robust growth, investors might grow concerned that the market has overly priced in rate cuts. Currently, there is a 92% likelihood, as indicated by the CME FedWatch tool, that the Fed will lower its target rate by at least 25 basis points in its upcoming policy meeting, with a 79.4% probability of multiple rate cuts by the end of the year. Goldman Sachs cautions that should the economy exhibit sustained strength, it could trigger a reassessment of these expectations, leading to upward pressure on interest rates, which would not bode well for stock market performance.
Despite these immediate risks, Goldman maintains a broadly optimistic outlook for risk assets, asserting that the US has entered a new secular bull market. The firm continues to advocate for investment opportunities within technology, services, and manufacturing sectors, as well as encouraging diversification strategies beyond US borders.
