Typically, the last mile is often the most challenging when striving for significant rewards. However, for the U.S. economy grappling with inflation, the most challenging phase might already be behind us.
The rosy picture comes from Goldman Sachs’ Macro Outlook 2024, led by a team of economists and analysts headed by Jan Hatzius.
“We don't think the last mile of disinflation will be particularly hard,” Goldman Sachs analysts wrote, explaining that the balance between supply and demand has already improved, and the impact on core goods disinflation is still unfolding and is expected to continue throughout much of 2024.
Goldman Sachs holds a notably more optimistic view compared to the consensus regarding the performance of the U.S. economy, echoing their correct prediction made in 2023.
U.S. Recession Probability At 15%, Says Goldman Sachs
While the median forecaster still estimates a 50% probability of a U.S. recession occurring in the next 12 months, Goldman Sachs’ forecast indicates a lower recession probability of 15% for 2024.
Goldman Sachs anticipates a 2.1% growth rate for the U.S. economy in the coming year, which is more than double the 1% estimate from the average analysts. According to Goldman Sachs economists, this growth will be driven by a substantial increase in real disposable income, aided by an environment of significantly reduced headline inflation and a resilient labor market.
Several factors are expected to have a positive impact on the economy, including central banks’ willingness to cut interest rates to avoid a recession and a rebound in manufacturing activity.
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A Strong Year For Bonds
The positive news is that these baseline forecasts, characterized by near-trend growth and decreasing inflation, create a favorable economic environment for financial markets.
Despite the attractiveness of cash returns, Goldman Sachs anticipates that other asset classes will outperform in 2024.
The 12-month forecast for the S&P 500 Index stands at 4,700, implying an almost 8% increase in the SPDR S&P 500 ETF Trust SPY compared to its current levels.
Goldman Sachs suggests that equities may perform well if central banks decide to lower interest rates earlier than expected, whereas bonds are expected to perform better if recession risks increase.
Therefore, the investment bank recommends a diversified portfolio as a strategy to navigate potential risks in the coming year, with a slight preference for long-dated bonds.
In the coming year, Treasury yields are expected to decline significantly. Goldman Sachs believes that the value of bonds as a hedge against recession will rise in a scenario where central banks cut interest rates to mitigate downside growth risks, particularly as inflation continues to decline.
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