Goldman Sachs now sees a 38% chance of a U.S. recession

Speaking of the e-word…let’s take a look in the crystal ball this morning. Not just any crystal ball. This one says “property of Goldman Sachs” on the bottom of the glass.

Goldman is pretty bearish on the U.S. and global economy, which is a warning we should pay close attention to as we near the kick-off of another corporate earnings season. Yes, Q1 results start coming out next week.

Goldman economists have slapped a “below consensus” label on its growth forecasts for the United States, Canada and Europe. That shouldn’t come as too much of a surprise. To recap: runaway inflation, supply-chain snags and the choppy COVID recovery were already conspiring as of late last year to jolt the global economy in 2022. But then war broke out in Ukraine in late February, plunging the world into an epic energy crunch, and forcing economists to rip up their estimates as it became apparent households would have to cut back on spending and businesses would curtail investments.

Goldman now says the odds of a recession in the U.S. stand at 38%. Disclosure: the Goldman models have been forecasting the likeliness of a U.S. downturn at anywhere between 35-40% since the war broke out—in other words, the situation has gotten no better in recent days, even as oil prices stabilize.

That’s because just about everyone on Wall Street is predicting oil prices will surge again ahead of summer driving-season, particularly if Western powers slam Moscow with more sanctions, and if they specifically target Russia’s energy exports. A reminder: I covered the global winners/losers scenario of surging oil prices in the latest issue of Fortune.

Worth mentioning this morning is just how destructive rising energy prices are to consumer-driven economies. (In the U.S., the consumer is the engine, responsible for about 70% of GDP.) Goldman calculates that every $10-per-barrel rise in real oil prices subtracts about 0.15% in growth from the U.S., Canadian and European economies. Brent crude is at about $109 this morning. If it were to climb to about $150 this summer, as some predict, that would likely wipe 60 basis points off growth in the three regions.

The good news/bad news take is that energy inflation will mean the economies of these three powers will undoubtedly underperform over the next few quarters, but that factor is “unlikely to trigger a recession of [its] own,” writes Goldman’s chief economist Jan Hatzius. We have to attach an asterisk to Europe, however. Any kind of cut in Russian gas to the eurozone would “likely” sink the bloc into recession, Hatzius says.

So, we know the consumer is in trouble, and that businesses will have to adapt too. And that adds up to bad news for investors. Goldman is sticking with its 4,700 year-end forecast for the S&P 500, which implies less than 4% growth for the rest of the year. Its worst-case scenario is 3,600, which would mean the benchmark has plunged into bear territory.

That’s the Goldman “recession scenario.”

I told you it was pretty bleak. But the sun is shining here. It’s Rome, after all.

Have a nice day, everyone. There’s more news below.

Bernhard Warner
@BernhardWarner
bernhard.warner@fortune.com

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This edition of CEO Daily was edited by Bernhard Warner.