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Sept. 16, 2022, 8:34 a.m. EDT

A further 27% drop in the S&P 500 could be coming if inflation hawks are right, Goldman Sachs team warns

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By Steve Goldstein

Stocks slumped in the final hour, and after hours, FedEx issued the worst warning relative to expectations that one Deutsche Bank analyst has seen in 20 years.

Not exactly TGIF this Friday.

What the sellside is slowly realizing is not just that the Fed is going to be aggressive in September after the latest shocking inflation figure, but that the central bank will have to keep rates higher, and for longer. The British pound /zigman2/quotes/210561263/realtime/sampled GBPUSD +0.3792% , in some respects a proxy for financial market conditions, fell to its lowest level since 1985 vs. the U.S. dollar on Friday, moving below $1.14.

In a new note to clients, Goldman Sachs chief markets economist Dominic Wilson and global markets strategist Vickie Chang crunched the numbers on what it would mean if Fed has to take a more aggressive path than the market is forecasting.

The results are not great. If the Fed has to hit the economy hard enough to get the unemployment rate up to 5%, the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.26% would have to fall 14% to below 3,400, the yield on the 5-year note /zigman2/quotes/211347048/realtime BX:TMUBMUSD05Y -2.15% would have to rise 91 basis points, and the trade-weighted dollar would rise 4%.

In the more severe scenario where the jobless rate would have to hit 6%, the S&P 500 would fall 27%, to below 2,900, the yield on the 5-year Treasury would climb 182 basis points, and the dollar would rise 8%.

(The last dot plot from the Fed itself shows the unemployment rate rising to 4.1% in 2024, and Goldman’s house forecast is for the unemployment rate to reach 4% by the end of 2024.)

That severe scenario implies a tightening of financial conditions comparable to the global financial crisis of 2008, and before that the recessions of the early 1980s.

“If only a severe recession—and a sharper Fed response to deliver it—will tame inflation, then it is likely that the downside to both equities and government bonds could still be substantial, even after the damage that we have already seen,” said the strategists.

By the way, Goldman headed into the new year predicting the S&P 500 would close 2022 at 5,100 .

The market

U.S. stock futures /zigman2/quotes/209948968/delayed ES00 +0.04% /zigman2/quotes/210219788/delayed NQ00 -0.33% were pointing to a downbeat start. The dollar /zigman2/quotes/210598269/delayed DXY -0.33% saw renewed strength. Crude-oil futures /zigman2/quotes/211629951/delayed CL.1 -2.32% were trading around $85.

The buzz

FedEx /zigman2/quotes/203047719/composite FDX +0.09% shares slumped 20% in premarket trade after issuing a warning on its fiscal first quarter and withdrawing guidance for the rest of the year. Rivals UPS /zigman2/quotes/201245396/composite UPS +0.62% and Deutsche Post /zigman2/quotes/202951856/delayed XE:DPW -0.26% also fell.

General Electric /zigman2/quotes/208495069/composite GE +0.18% CFO Carolina Happe said at an investor conferenc e it’s seeing continued supply-chain pressure that will impact free cash flow in the third quarter.

Uber /zigman2/quotes/211348248/composite UBER -2.04% said it’s responding to a cybersecurity incident and has contacted law enforcement.

NCR /zigman2/quotes/203631053/composite NCR -1.12% said it would split into two companies , rather than sell itself.

/zigman2/quotes/210561263/realtime/sampled
US : Tullett Prebon
1.2176
+0.0046 +0.3792%
Volume: 0.0000
Dec. 7, 2022 11:23a
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/zigman2/quotes/210599714/realtime
US : S&P US
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Dec. 7, 2022 11:23a
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/zigman2/quotes/211347048/realtime
add Add to watchlist BX:TMUBMUSD05Y
BX : Tullett Prebon
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Volume: 0.00
Dec. 7, 2022 11:23a
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US : U.S.: CME
$ 3,946.50
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Volume: 963,190
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105.23
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Dec. 7, 2022 11:13a
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US : U.S.: Nymex
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US : U.S.: NYSE
$ 173.21
+0.16 +0.09%
Volume: 315,166
Dec. 7, 2022 11:23a
P/E Ratio
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2.65%
Market Cap
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Rev. per Employee
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US : U.S.: NYSE
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Dec. 7, 2022 11:23a
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Market Cap
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XE : Germany: Xetra
38.44
-0.10 -0.26%
Volume: 1.13M
Dec. 7, 2022 5:08p
P/E Ratio
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4.68%
Market Cap
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Rev. per Employee
€158,777
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/zigman2/quotes/208495069/composite
US : U.S.: NYSE
$ 85.43
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P/E Ratio
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Dividend Yield
0.37%
Market Cap
$93.18 billion
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$447,988
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/zigman2/quotes/211348248/composite
US : U.S.: NYSE
$ 26.37
-0.55 -2.04%
Volume: 6.18M
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P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$53.69 billion
Rev. per Employee
$991,399
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/zigman2/quotes/203631053/composite
US : U.S.: NYSE
$ 22.55
-0.25 -1.12%
Volume: 142,189
Dec. 7, 2022 11:23a
P/E Ratio
25.88
Dividend Yield
N/A
Market Cap
$3.13 billion
Rev. per Employee
$207,079
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