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'A recession is not inevitable' but stocks are being priced as if it were: Goldman Sachs

The markets are being valued as if a recession is all but certain despite robust economic data, according to Goldman Sachs Chief U.S. Equity Strategist David Kostin.

"A recession is not inevitable, but clients constantly ask what to expect from equities in the event of a recession," Kostin wrote in a new note to clients on Thursday. "Our economists estimate a 35% probability that the U.S. economy will enter a recession during the next two years and believe the yield curve is pricing a similar likelihood of a contraction. Rotations within the U.S. equity market indicate that investors are pricing elevated odds of a downturn compared with the strength of recent economic data."

Kostin added that dividend futures markets currently imply that S&P 500 dividends will fall by nearly 5% in 2023. Companies tend to cut dividend payouts and stock buybacks during recessionary periods to conserve capital.

 A bull tied to a wall. Photo: JOHANNES EISELE/AFP via Getty Images)
A bull tied to a wall. Photo: JOHANNES EISELE/AFP via Getty Images) (JOHANNES EISELE via Getty Images)

The commentary arrives after a brutal day for the markets, triggered by a host of fresh concerns.

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U.S. stocks plunged on Wednesday after a series of disappointing quarterly results from some major retailers: Target, Walmart, and TJX Companies pummeled already-battered market sentiment as all three companies struck worrying notes on the state of the U.S. consumer and runaway inflation.

Investors also further digested remarks from Federal Reserve officials reaffirming their aims of reining in inflation.

By the closing bell, the S&P 500 had slid by 4% in its worst day since June 2020, closing at 3,923.68. The Nasdaq Composite dropped 4.7% to settle at 11,418.15, while the Dow Jones Industrial Average fell by more than 1,100 points, or 3.6%.

Even shares of often safe-haven stocks such as Coca-Cola and Apple lost 5.6% and 7%, respectively.

Stock futures on Thursday showed that losses would likely continue, with the Dow shedding more than 275 points as of 8:25 AM ET. This morning, more profit warnings from retailers Kohl's and Bath & Body Works have damaged the appetite of the bulls.

Tech heavyweight Cisco's disappointing quarter after the close yesterday isn't helping bruised market sentiment, either.

Kostin's research shows a recession could batter markets further.

Across 12 recessions since World War II, he noted, the S&P 500 has fallen from peak to trough by a median of 24%. A decline of this magnitude from the S&P 500 peak of nearly 4,800 in January would bring the index to about 3,650, or 11% below current levels. The average decline of 30% would reduce the S&P 500 to 3360, or 18% lower from today.

"We now have P/E multiplies compressing, profit margins rolling over and the growing prospect that sales will slow in response to both supply issues and the growing prospect of an economic slowdown," Bleakley Advisory Group chief investment officer Peter Boockvar said in a note to clients. "A perfect storm."

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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