Is a U.S. Recession on the Horizon?

Concern about a U.S. recession is growing.

Stock market investors are recalibrating their expectations as soaring commodity prices, reduced fiscal spending and rising interest rates threaten the economic expansion. Goldman Sachs Research forecasts the S&P 500 Index of large U.S. companies will end the year at 4700 (the previous forecast was 4900), which would be a gain of about 12% from today’s level.

The decline in the S&P 500 in recent weeks suggests about a 40% likelihood of U.S. recession, which would lead to much lower valuations and earnings, according to Goldman Sachs Research. Separately, our economists estimate there’s a 20% to 35% chance of a U.S. downturn, which is roughly in line with models based on U.S. Treasury yields.

The S&P 500 has dropped about 24% from peak-to-trough around past recessions (based on the median). But when the U.S. economy avoids a sustained contraction after a 10% market correction, the index has returned 15% over the next 12 months.