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There is a saying in Vegas that "everyone loves a gambler until they lose," and if you've ever seen crowds gather around a player with a hot hand, you know it's true. Unfortunately, the other side of playing a hot hand is the inevitability of it running just as cold. Goldman Sachs analysts have been examining the stock market and they believe it's so overheated that a 30% correction might be in the cards.
Like all investment firms, Goldman Sachs has analysts who analyze stock market data to try to predict major downturns that could harm Goldman's and its clients' holdings. Although overheated markets always carry an elevated risk of a major correction, Goldman sees an additional threat: the potential impact of uncertainty surrounding the incoming Trump administration's economic policies.
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Goldman's data shows that the risk level has increased sharply since September 2024. The specific data points they've used to track that risk include:
· Overall U.S. economic growth
· Inflation (which may be on the rise again and could halt the Federal Reserve's rate cuts)
· American economic policy
· Market-wide increased valuation of equities (stock prices)
Speaking for a team of Goldman Analysts, Andrea Ferrario said, "Market variables have contributed the most to the increase in inflation momentum, with both commodity prices and U.S. breakeven inflation increasing over the past few months." Goldman's report highlights that the Trump Administration's tariff policies will affect global trade as being at the "epicenter" of the growing uncertainty.
They also note that uncertainty over European economic policy elevates the risk of a major correction. Like the Federal Reserve, the European Central Bank spent 2024 trying to stave off inflation by managing interest rates. Goldman says the uncertainty in the European region is at an "all-time high" and has already caused a pullback in the valuation of European equities.