So here we are, living in what feels like stock market paradise. The S&P 500 is hitting records like it’s going out of style, everyone’s feeling pretty good about their portfolios, and the Fed is about to start cutting rates like they’re handing out free samples at Costco.
But leave it to Goldman Sachs to be that friend who points out the spinach in your teeth right before the big photo. In a note that’s basically the financial equivalent of “well, actually,” they’ve identified two ways this whole party could come crashing down.
Risk #1: The R-Word Makes a Comeback
Remember when everyone was obsessed with whether we’d hit a recession? Well, that fear hasn’t exactly disappeared—it’s just been taking a little nap while we all got distracted by the shiny new records.
Here’s the thing: lately, bad news has been good news for stocks. Weak job numbers? Great! That means the Fed will cut rates faster. Slowing manufacturing? Fantastic! More rate cuts coming our way. It’s like we’re all playing economic limbo—how low can the data go before we actually start worrying?
But Goldman’s pointing out that this whole “bad news is good news” vibe could flip faster than a pancake on Sunday morning. If the job market keeps getting softer (and it has been—we actually added 911,000 fewer jobs than initially thought earlier this year), investors might suddenly remember that unemployment going up is, you know, actually bad.
The unemployment rate is still pretty low, but hiring has been about as enthusiastic as a teenager asked to clean their room. And if that trend continues, we could see markets go from “yay, rate cuts!” to “oh no, we’re actually in trouble” pretty quickly.
Risk #2: The Fed Cuts Reality Check
On the flip side, what if the economy stays strong? Sounds great, right? Well, not so fast there, optimist.
Right now, investors are pricing in Fed rate cuts like they’re guaranteed. We’re talking 92% odds of at least a quarter-point cut at the next meeting, and nearly 80% chance of three or more cuts by year-end. That’s a lot of confidence in a world where the Fed has been about as predictable as weather in the Midwest.
If the economy keeps chugging along nicely, the Fed might not be as generous with the rate cuts as everyone’s expecting. And when reality doesn’t match expectations in the stock market, things can get ugly fast. It’s like showing up to a potluck expecting prime rib and finding out it’s actually a vegan buffet.
The Bottom Line
Goldman still thinks the path forward is “friendly” for stocks (their word, not mine—apparently investment banks are into casual language now). They believe we’re in a new secular bull market, which is fancy talk for “this party might keep going for a while.”
But their warning is worth heeding: we’re in a pretty sweet spot right now, and sweet spots have a funny way of not lasting forever. Whether it’s recession fears making a comeback or rate cut expectations getting a reality check, there are definitely ways this could all go sideways.
The key is staying aware that even when everything looks perfect, smart money is always thinking about what could go wrong. Because in the stock market, the only guarantee is that there are no guarantees.