“A recession is not inevitable,” Goldman strategists led by David Kostin wrote in a note. “Rotations within the U.S. equity market indicate that investors are pricing in elevated probabilities of a recession compared to the strength of recent economic data.”
As an example, Kostin cited the weakness of cyclical stocks versus defensive sectors since January, which he said showed a 17 percentage point drop.
“The relative performance of these two factors has closely tracked the level of the ISM index for more than a decade,” Kostin said. “The ISM currently stands at 55, but the relative performance of cyclical versus defensive stocks would imply a level below 50″.
U.S. stocks have taken a beating this year as signs of stubbornly high inflation and a tightening Federal Reserve raise the specter of an economic recession.
The S&P 500 is now down 18% from its January high and nearing bear market territory after posting Wednesday’s worst daily decline since June 2020 following earnings reports from major U.S. retailers.
But while it’s widely expected that stocks will continue to fall, the view that fears of an impending recession are overblown has been echoed by strategists ranging from Kate Moore of BlackRock Inc. to Marko Kolanovic of JPMorgan Chase & Co. Kolanovic is confident that things can improve for U.S. stocks as the year progresses.
Comparing the S&P 500’s performance in 12 recessions since World War II, Goldman’s Kostin said the U.S. benchmark index contracted from peak to trough by a median of 24%.
A similar drop for the index from its all-time high in January would bring it closer to 3,650 points, nearly 7% below current levels, while the 30% average drop would take it to 3,360, Kostin said.
The futures market also implies that S&P 500 dividends will fall nearly 5% by 2023. “Over the past 60 years, S&P 500 dividends have not declined outside of a recession,” the strategist said.
Among sectors, Kostin said defensive and quality factors have tended to outperform 12 months before the start of a recession. “Across five recessions since 1981, median experience notes that energy, commodities, health care and utilities outperformed the index,” he wrote.