- There’s a growing chance that the steep correction in stocks keeps going, Goldman Sachs said.
- The bank said the risk of further downside climbed past 35%, even as Trump hit pause on tariffs.
- The risk of a stock correction has remained elevated since January, analysts said in a note.
Donald Trump’s tariff pause probably isn’t enough to stem a deeper correction in the stock market, Goldman Sachs said.
Already, stocks on Thursday were giving back a chunk of the gains recorded in Wednesday’s historic session. Analysts at Goldman Sachs say they still see an “elevated” risk that stocks will fall even further, even after the significant drawdown in the market in recent weeks and despite Trump dialing back most of his tariffs on Wednesday.
Goldman Sach’s equity drawdown risk model, which bases its probability of further market downside on a handful of indicators, recently spiked past 35% on both a three-month and 12-month horizon. That’s a strong signal that the S&P 500 is headed for further declines, the bank wrote in a note, adding that the model’s downside risk has been elevated since January.
“Usually levels above 35% give a strong signal of downside risk to equities, and probabilities for both 3m and 12m are now above those levels, especially when applying our economists’ bearish macro baseline,” analysts wrote. “As we showed previously, historically, a higher equity drawdown probability has translated into lower forward returns for equities and the risk fo deeper max drawdowns.”
Analysts pointed to several factors that have raised the risk of more downside.
For one, leading growth indicators in the economy have declined. In particular, the bank pointed to the recent decline in manufacturing activity as an example, with new orders and production measures contracting over the month of March, according to the Institute of Supply Management.
Also, recent market volatility has also hurt the outlook for stocks. The CBOE Volatility Index, also known as the stock market's fear gauge, has declined slightly since Trump first implemented reciprocal tariffs but remains elevated compared to levels at the start of the year.
Policy uncertainty also remains high. The US Economic Uncertainty Index, one measure of unpredictability, spiked to a level of 689 on Wednesday, according to Federal Reserve data, down from a peak 992 in April, but still elevated on a historical basis.
Downside risk also looks like it hasn't yet peaked, according to Goldman's projections.
"Before a clear peak in the equity drawdown probabilities, risk of further corrections remains elevated in the near term. The size of the drawdown does not lower near-term drawdown risk," analysts said.
Goldman Sachs rescinded its recession forecast after Trump paused most reciprocal tariffs on Wednesday, but the bank still thinks there's a 45% chance the economy could tip into a downturn next year.
Previously, analysts said they saw the S&P 500 dropping as low as 4,600 in a full downturn scenario, which implies the index dropping another 13% from levels on Thursday, or a 25% drop from its February all-time high.
Concerns around tariffs have weighed significantly on Wall Street's outlook in recent weeks. Goldman Sachs, Barclays, and RBC are among the big banks who have cut their forecast for stocks, citing the trade war as a major headwind for equity prices.