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Goldman Sachs sees a 38% chance of recession in the next 24 months

April 5, 2022, 7:50 PM UTC

There certainly hasn’t been a shortage of recession predictions on Wall Street over the past few months. Now, even some of the most respected U.S. investment banks have begun to sound the alarm. 

Goldman Sachs analysts said over the weekend that they see a 38% chance of a recession in the U.S. over the next 24 months. And on Tuesday, Deutsche Bank economists David Folkerts-Landau and Peter Hooper said they believe a recession will hit the U.S. economy sometime in the next two years in a note to clients.

Even former Federal Reserve officials have been getting in on the action.

Former New York Fed president Bill Dudley wrote that he believes a recession is “inevitable” in an op-ed published last week. And on Monday, former Fed governor Lawrence Lindsey told CNBC the U.S. economy will see a recession as soon as next quarter as inflation continues to eat into consumer spending. 

The Goldman Sachs team, led by chief U.S. equity strategist David J. Kostin, argued in a note to clients that the recent yield curve inversion—in which two-year Treasury yields surpassed 10-year yields—has increased the likelihood of a recession dramatically.

Some have argued a 2s10s yield curve inversion isn’t necessarily a bad thing for stocks in the near term, based on historical returns. Since 1965, when the 2s10s yield curve has inverted, the S&P 500 has boasted an average return of 9% over the following year, according to Goldman Sachs data. That means predictions of an imminent recession could be premature.

Mark Haefele, chief investment officer at UBS Global Wealth Management, cautioned investors against “overinterpreting” yield curve inversions in a note to clients on March 30.

“Yield curve inversions have historically predicted recessions with a long and uncertain lag,” Haefele wrote. “Instead, our base case now is for only modest upside for stocks.” 

Still, a 2s10s yield curve inversion has preceded a recession by an average of 20 months over the past 57 years, meaning a recession may not be imminent, but it’s likely coming.

And Goldman analysts argued that it may be coming even sooner than it has historically, too.

The only other time the yield curve inverted in a period of high inflation was in 1973, the Goldman team said. And after that, the S&P 500 saw negative returns over the next year, eventually falling into a bear market that didn’t end until the index was down a whopping 48%.

“The early 1970s experience provides a clear example of the large downside risk facing equity investors today,” the analysts wrote.

Goldman recommended investors look to stocks with high profit margins and strong cash flow to navigate the coming storm. 

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