Banks Lower S&P 500 Forecasts and Raise Recession Odds: What This Means for Investors

Vyacheslav Dvornikov

Apr 7, 2025

In recent weeks, analysts have been actively revising their forecasts for the American market. On April 1, the three most confident "bulls" on Wall Street admitted they were too optimistic in their forecasts for the American market: Goldman Sachs, Societe Generale, and Yardeni Research began the second quarter by lowering their S&P 500 year-end targets. For Goldman and Yardeni, it was the second reduction in less than a month. 

After Donald Trump announced massive tariffs on Wednesday, April 2, banks are raising their recession probability estimates for the US. Goldman increased its forecast from 35% to 45% (against a historical average of 15%) over the next 12 months: J.P. Morgan — from 40% to 60% by the end of the year. Over the weekend, Evercore ISI joined other Wall Street firms by lowering its forecast from 6,800 points to 5,600. Eugenio Kireu, advisor to the ARGO fund, explains how to interpret such forecasts and estimates.

Investment banks are revising their estimates in response to changing investor sentiment. They are largely capturing current sentiment rather than providing an objective assessment of the future.

The change in sentiment is not unfounded. The imposed tariffs were higher than expected and affected almost all US trading partners. This is expected to lead to higher prices for American consumers and reduced availability of goods. In other words, there will be a reduction in aggregate supply, which in turn means slower GDP growth and higher prices. On the other hand, the correction in risky asset prices, along with the expected reduction in government spending and the US budget deficit, should lead to a decline in aggregate demand. This is likely to weaken aggregate demand, which will also negatively impact GDP growth but will help reduce inflation. 

As a result, both factors will slow economic growth or lead to a recession. The impact on prices remains uncertain and will depend on the scale of political and market processes, as well as the economy's ability to adapt to changing conditions. We warned about these trends even before the tariffs were introduced and the markets sharply declined. Now we are merely stating that this has materialized — and to a greater extent than the consensus forecast suggested.

Against this backdrop, the rise in recession expectations is quite logical. The measures taken and market reactions indicate that consumption, investment, and government spending should decrease. How severe the reduction will be — even the Fed does not dare to predict. The example of Vietnam suggests that many US partners will likely be able to negotiate improved trade conditions. We also know that a key part of the US administration's economic policy is tax reduction. This could mitigate the negative effect of tariffs and falling demand. In other words, uncertainty about the future is very high, and the market decline is not yet deep enough to offset the consequences of accumulated optimism that has driven markets upward over the past two years.

Even considering last week's correction, the US stock market remains expensive relative to risk-free asset yields. Predicting the level of the S&P 500 or Nasdaq 100 by the end of the year is pure speculation. But comparing current fundamental indicators with historical data can be useful for understanding the overall level of overvaluation.

Since World War II, earnings per share for S&P 500 companies have grown by an average of 6% per year. This trend has remained stable in recent decades. Currently, earnings per share are about 22% above this trend. This is the result of monetary and fiscal stimuli in recent years, amplified by optimism around AI technologies and the effect of rising investment value. History shows that during recessions, earnings per share usually declined — and not just to the long-term trend, but often below it. Moreover, in calm periods, investors typically demand an additional return of 2–3% per year over the risk-free rate and the company's earnings growth rate — the so-called risk premium for stock investments. Currently, this premium is –0.14%. This is, of course, above the –1.9% level observed in the second half of last year, but still indicates a willingness of investors to sacrifice long-term expected returns for short-term speculation.

Let's consider a hypothetical scenario where a recession does occur. In this case, company profits may fall to levels corresponding to the average growth rate of 6%, i.e., drop by 22% from the current value. Simultaneously, speculative optimism is likely to wane, and the risk premium will return to at least 2%. The Fed will face a difficult choice between supporting the economy and preventing long-term inflation from rising amid increased tariffs. This means that the real interest rate is likely to be low, but hardly negative. In other words, expecting a rate and inflation at around 2.5% would be reasonable.

None of these assumptions can be called overly pessimistic or catastrophic. However, the result of the S&P 500 index calculation under such assumptions may be shocking for many: its level is approximately 3,850 points. This is 37% below last year's peaks and 24% below current levels. Of course, less severe scenarios are possible. There are also quite realistic scenarios leading to even more significant declines. In other words, the market was recently so overheated that returning to a normal state may require a correction usually associated with crisis periods. Alternatively, it could also be a long period of very low growth.

Let us remind you: such calculations are not a forecast. They are merely a useful exercise for evaluating possible scenarios. Optimism may return. But its realization requires additional capital. Increased inflation and a possible recession may limit opportunities for speculative activity by private investors, reducing such risk. How exactly the mentioned factors will change over the year — no one knows. If a recession does occur, it will certainly not support risky asset prices. More importantly, a recession is not necessary for their decline. From this perspective, attempts to assess the probability of a recession are a tool of dubious usefulness for an investor.