Don't worry about stocks with the Fed closing in on its dream no-recession scenario, Goldman Sachs says

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Don't worry about stocks with the Fed closing in on its dream no-recession scenario, Goldman Sachs says
Stocks have slipped lower in August after starting 2023 with a breakneck rally.Mario Tama/Getty Images
  • Stocks have given up some of their gains in August, after starting 2023 on a tear.
  • But investors shouldn't fret about the declines, according to Goldman Sachs.
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Stocks' disappointing run in August is likely a short-term blip rather than a longer-term trend, according to Goldman Sachs.

In a note to clients seen by Insider, the bank restated its view that there's just a 20% chance the US suffers a recession within the next 12 months – and said the Federal Reserve is closing in on a dream soft-landing scenario that will help equities rebound.

The benchmark S&P 500 has dropped 2% already this month, while the tech-heavy Nasdaq Composite is down 4% and just suffered its first two-week losing streak of 2023.

But "the runway for a soft landing is in sight, and should support risk assets in coming months," Goldman Sachs' chief economist Jan Hatzius said Monday, referring to the ideal economic outcome where the Fed brings inflation down to its 2% target without triggering a recession.

"The disinflation of the past few months has made us more confident that Fed officials are done hiking rates," he wrote, referring to the fact that headline inflation has started to cool off as the economy feels the full impact of the central bank's aggressive tightening campaign.

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Hatzius also predicted that spiking bond yields will soon stabilize as investors factor in the end of the Fed's hiking cycle and realize they've been "overestimating the near-term impact of increased Treasury supply", with the US ramping up its debt issuance in recent weeks.

Steadier longer-term yields would likely boost stocks by reducing the relative appeal of fixed income as a potential alternative.

The economist added that benchmark oil prices, which have jumped around 15% to over $80 a barrel since the start of July, will hold at their current level due to a rise in spare capacity, more activity from international offshore projects, and slowing production cost inflation in the US.

Steadier oil prices would also likely be good news for stocks, by easing investors' worries about persistent inflation.

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