According to Bloomberg, economists at Goldman Sachs warned in a recent research note that U.S. investors are significantly underestimating the risk of a recession, potentially increasing the impact of a recession next year. Bloomberg also reported that researchers at Goldman estimate a 39% chance of a slowdown in U.S. growth, but risk assets only account for an 11% chance.

The analysts warned that investors are increasing their exposure to the effects of “recession scares” in 2023, by underestimating the chance of a recession. The researchers noted that a variety of measures pointed to increased stress in asset classes marketwide, as it was reported by Bloomberg, while Goldman still considers the risk of a recession to be relatively low, said Daily Caller.

MarketWatch reported in late October that Goldman Sachs has previously pushed back on this narrative, despite an increasing number of economists and financial executives predicting a recession within the next year.

According to Bloomberg, Deutsche Bank’s chief U.S. equity and global strategist, Bankim Chadha, predicted the S&P 500 stock index would drop 19% from current levels to 3,250, before rebounding to 4,500 points in the fourth quarter, a roughly 12.5% gain. A rebound to occur is anticipated by Goldman’s team, but only back to the current level, around 4,000 points.

The firm’s analysts predict that equity prices could decline an additional 10% for six to nine months following their peak, if a downturn is more severe than Goldman predicts, and a recession takes hold, according to Bloomberg. They also say that a two-month rally in equity markets is being followed by the relatively pessimistic outlook from the two financial titans, as investors bet that central banks, including the U.S. Federal Reserve, would slow the rate of interest rate hikes.

The Goldman note reads: “Equity risk premia appear low considering elevated recession risk and uncertainty on the growth/inflation mix.”

It is recommended by the firm that investors should take a “relatively defensive” stance, focusing on the near future and high-yield assets.

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