Goldman Sachs GS CEO David Solomon believes that the stock market will slide to continue in 2023 and believes that the odds of a recession hitting the U.S. economy are about 2 out of 3.
Solomon stated at the Wall Street Journal's CEO Council Summit on Tuesday that stocks will be lower, along with oil and real estate, both commercial and residential, while the U.S. dollar is poised to rise slightly next year.
Solomon put the probability of a soft landing or a slowdown in inflation that doesn't tip the economy into recession for the U.S. economy at only 35%.
I would define a soft landing as we get inflation back close to 4% inflation, maybe we have a 5% terminal rate and we have 1% growth, Solomon said. I think there is a reasonable possibility that we could navigate a scenario like that. Solomon said that there is a very reasonable possibility that we could have a recession of some kind.
Solomon's personal view shows little optimism than the consensus forecasts of economists at his firm, who see the U.S. economy narrowly avoiding a recession and stocks closing flat next year.
In its year-ahead outlook published last month, the equity strategy team said that the S&P 500 will finish at 4,000 in 2023, the firm's equity strategy team said. The benchmark index closed at 3,941 on Tuesday.
Solomon said when asked about the 10 - year Treasury yield in a Q&A at the end of his interview, he said that his view depends on whether or not an economic downturn can be avoided.
If you give you a number, if you listen to my view, you have got a yield curve that if you normalize -- if you get that soft landing -- you'll see that 10 year Treasury yield is higher, Solomon said. If you don't get that soft landing, you're going to see a reversal of policy, and then you can see rates the same or lower. Solomon said it was unsurprising to be in a period of higher rates as the Federal ReserveFederal Reserve attempts to bring down inflation caused by extensive fiscal stimulation and the black swan effects of war in eastern Europe.
The market is making an assumption that we will reach the terminal rate sometime soon, and the Fed will bring rates back down, and if you look at most tightening cycles, historically you do see a reversal, Solomon said. We're still early in this and I think it's uncertain. Goldman Sachs predicts that the U.S. central bank's key policy rate, the federal funds rate, will peak around mid-next year at 5% to 5.25%.
According to economists at the investment bank, the Federal ReserveFederal Reserve does not believe that it will begin cutting interest rates in 2023.