There was a glaring contradiction within Goldman’s Research group (unlike its FICC traders, who tend to have a much better and cohesive grasp of recent market developments. and whose predictions are far more accurate): on one hand, the bank’s equity research team led by David Kostin (which a little over a year ago had forecast an S&P price target of 5,100 for Dec 2022 which was, well, very, very wrong) was turning increasingly bearish; on the other hand, the bank’s economists were becoming increasingly more constructive on the economy, and were one of the few sellside teams to predict a soft-landing by the US, and no recession in 2023.
That growing divergence came to a head last week with the shockingly high NFP print, which meant that Goldman would have to take a stand: either its equity strategists would capitulate, as Goldman’s economists took a victory lap (and sternly rejected a recession as even a downside case for 2023), or David Kostin would stand his ground while accusing the Biden Department of Labor of fabricating jobs data.
But in the end it wasn’t so much the payrolls report, as the market reaction to Powell’s latest dovish pivot, which sent spoos briefly over 4,200 and made a mockery of all sellside bears, and as we predicted one week ago…
So many bearish sellsiders getting tap on the shoulder. Glorious
— zerohedge (@zerohedge) February 1, 2023
… it was only a matter of time before Kostin and his bearish peers such as Wilson and Kolanovic (because between Goldman, JPM and Morgan Stanley all being uber-bullish, clearly the only obvious trade was higher), threw in the towel.
That’s precisely what happened over the weekend, when in his latest Weekly Kickstart note, Kostin admitted that he had been too bearish and left with no choice than to chase the market rally, the Goldman strategist wrote that the “improvement in US and global macro data has lifted the S&P 500 by 8% YTD and leads us to lift our 3-month S&P 500 target to 4000 (from 3600).”
Still, unwilling to lose all credibility in just the 2 months since he published his headscratchingly-low price target (which, of course, was just a function of the market slump in late 2022 just as his target increase is entirely the result of the furious January squeze), Kostin added that his “S&P 500 index forecast remains 4000, slightly below the current level” or in other words, stocks aren’t going anywhere in the last 9 months of the year… which of course will be dead wrong. Here is more from his latest note (full report available to pro subs):
“A soft landing – and in fact above-trend growth – is already priced in US equities. Valuations are elevated vs. history and will be constrained by an eventual rise in interest rates. Even avoiding recession, earnings are unlikely to grow substantially in 2023. Alternatives to US equities, including non-US stocks, credit, and cash, offer superior risk-adjusted returns and are garnering assets. The debt ceiling deadline later this year adds uncertainty to the path for US stocks.“
Whatever. As long as Goldman’s equity research head (unlike its FICC/S&T team which has turned rather bullish in the past few weeks), and its big bank peers Kolanovic and Wilson keep fighting the tape, stocks will keep rising. Once they all capitulate and turn (even more) bullish again – which they will – that’s what it will be time to short.
Meanwhile, as Kostin was forced to admit defeat on his bearish take – if only for the next 3 months for now – Goldman’s chief economist Jan Hatzius just published a note in which he cuts his recession probability forecast even more, and has trimmed the subjective probability odds that the US will enter a recession in the next 12 months from 35% to 25%, less than half the 65% consensus estimate in the latest Wall Street Journal survey.
Continued strength in the labor market and early signs of improvement in the business surveys suggest that the risk of a near-term slump has diminished notably. And while Q1 GDP still looks soft—our latest tracking estimate is +0.4%—we expect growth to pick up in the spring as real disposable income continues to increase, the drag from tighter financial conditions abates, and faster growth in China and Europe supports the US manufacturing sector.
More in the full Goldman note available to pro subs.
Considering that this is the same Goldman team which in all of 2021 sided with the Fed in repeating over and over that inflation was transitory (despite our repeated mocking), we’ll respectfully ignore anything it has to say this time, and if a “soft landing” is the hill Goldman’s research team has decided it will die on in 2023, then we are confident that a recession is now inevitable. As for Goldman’s other prediction, that with no recession stocks will somehow close down from here (4150 to 4000), that too will be wrong, but not because stocks won’t tumble – they will once the recession is finally laid obvious for all – but once they soar right back after the Fed inevitably capitulates having pushed the economy into a sharp contraction, as was the plan all long.