The Downtrend in U.S. Stocks Is Hard to Reverse! Goldman Sachs' Latest Report Highlights the Limited Benefits of Tariff Suspension

The surge in US stocks on Wednesday was widely regarded as a "dead cat bounce," and Goldman Sachs echoed this view on Thursday, warning of an increasing likelihood of a sustained and significant market correction.

On Thursday, all three major US stock indices fell, with the Dow Jones Industrial Average dropping 2.5%, the S&P 500 declining 3.46%, and the Nasdaq Composite Index plunging 4.31%. Michael Gapen, Chief US Economist at Morgan Stanley, noted that delaying some reciprocal tariffs did help the market but would not reduce uncertainty.

Goldman Sachs analysts also pointed out in their report that the risk of a US stock market correction has remained high since January. Even after the recent sharp declines in US stocks and President Trump's cancellation of most tariffs on Wednesday, they still believe the risk of further declines in US stocks is elevated.

According to Goldman Sachs' stock pullback risk model, the probability of a US stock market decline within the next three and twelve months has surged to over 35%. Goldman Sachs explained that this is a strong signal indicating that the S&P 500 Index will continue to fall, as the model's downside risk has been rising since January.

Three Unfavourable Factors

Goldman Sachs stated that historically, higher probabilities of stock pullbacks lead to lower forward returns and increase the risk of larger pullbacks.

There are several reasons for the persistently high downside risk. Goldman Sachs pointed out that, first, leading indicators in the economic sector have shown signs of weakness, particularly the recent decline in US manufacturing activity. According to data from the Institute for Supply Management, both new orders and production indicators in the US contracted in March.

Second, the roller-coaster volatility in the US stock market in recent weeks has also damaged the market outlook. The CBOE Volatility Index has slightly declined since President Trump first implemented reciprocal tariffs but remains high compared to levels at the beginning of the year.

In addition to unfavorable economic news, political risks in the US have further heightened uncertainty. According to data from the US Fed, the US Economic Policy Uncertainty Index, which measures unpredictability, surged to 689 on Wednesday, down from the peak of 992 earlier this month but still at historically high levels.

Previously, Goldman Sachs analysts stated that in the event of a full economic downturn, they expect the S&P 500 Index to fall to 4,600 points, implying a further 13% decline from Thursday's levels or a 25% drop from February's all-time high.