Timing the next recession? Here’s when it could hit
Last week’s market sell-off stoked fears that the next recession could be around the corner, ending the 10-year bull market, but according to Goldman Sachs, the economic expansionary cycle, likely, has room to run.
“Despite the recent sell-off, equity fundamentals are strong and we remain constructive on the path of the S&P 500,” the analysts said Sunday in a research note, adding that their yearend 2018 S&P 500 target remains 2,850.
“Our economists argue that the current expansion is still midcycle and assign a 37 percent probability of recession during the next 3 years.”
Goldman attributed the recent sell-off to the shock of rising interest rates, but it was the unwinding of popular fund positions, and not fundamentals, that exacerbated the selling.
“We see limited further downside. The S&P 500 EPS growth averaged 25% during 1Q and 2Q and consensus expects 21% growth in 3Q.”
Goldman analysts brought up the good and the bad when it comes to the market, noting that the S&P 500’s non-financial components' return on equity, which measures profitability, stands at a record high of 20.7 percent, boosted by lower corporate taxes and pretax margin expansion. But, looking forward, profit growth could be crimped by rising margin pressures.
The analysts brought up rising U.S. labor costs and tariffs as cautionary notes. Goldman’s Wage Survey Leading Indicator stands around 3.3 percent, the highest of this economic cycle, while their political economist believes there is a 60 percent chance that the U.S. will impose tariffs on most or all of the $267 billion of Chinese imports that have not been previously targeted with tariffs. Under that scenario, all of Goldman Sachs’ expected 2019 S&P 500 earnings per share growth could be eliminated.