Goldman: Stocks likely to drag US growth


NEW YORK • Equities have helped drive US economic growth as the market surged, but that’s likely to reverse soon, according to a forecast by Goldman Sachs Group Inc.

“The stock market is likely to turn from a significant contributor to strong growth at the start of the year into a modest drag next year, barring a further rebound in equity prices,” Goldman Sachs economists including Daan Struyven and Jan Hatzius wrote in a note last Friday. “We estimate that the 0.5 percentage point boost to GDP growth from higher equity prices at the start of the year has already disappeared.”

The run-up in the equity component of the Goldman Sachs Financial Conditions Index drove most of the 185 basis points of easing from the start of 2017 to late January, the index’s record low, according to the report. The stock market ’s drop of about 6% since reaching records in mid-September has been the biggest factor in the tightening of financial conditions since then.

The most likely case is that the equity impulse to growth drops to minus 0.25 percentage point next year, the economists said. That assumes the equity component of the Financial Conditions Index stays about even, which is “roughly consistent” with forecasts by the firm’s strategists for a year-end level of 2,850 on the S&P 500.

The index, which rises as financial conditions tighten, tracks changes in interest rates, credit spreads and the US dollar, as well as equity prices.

Goldman Sachs emphasised “substantial” uncertainty around its estimates, reflecting the two sided risks to equities themselves.

Its economists outlined a bullish case, with stock-market growth of 4% per quarter — taking the S&P 500 to about 3,350 by the end of 2019 — where the equity impulse to GDP rises to positive 0.25 percentage points. They also presented a bearish case in which stocks fall an additional 10% in the fourth quarter and stay flat afterward, putting the S&P 500 at around 2,500. That would send the growth impulse from equities to minus 0.75 percentage points, they said.

“Further sharp stock market moves represent an important two sided risk to our forecast that growth will gradually slow by end- 2019,” they said.