(Bloomberg) -- Goldman Sachs Group Inc. is turning more cautious on US credit and equity markets, becoming the latest on Wall Street to sound the alarm as the world’s largest economy is battered by President Donald Trump’s escalating trade war.
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Goldman strategists sharply raised their forecasts for US credit spreads, citing tariff risks and signs that the White House is willing to tolerate short-term economic weakness. The bank also cut its year-end target for the S&P 500 index. At the same time, Goldman’s teams raised European earnings estimates and expect the region’s credit spreads to show more resilience than the US.
“We are revising our spread forecasts wider to levels that demonstrate a more persistent repricing of risk premium, especially in the USD market,” Goldman credit strategists led by Lotfi Karoui wrote in a note. The bank now expects US investment-grade bond spreads to hit about 125 basis points in the third quarter compared with their previous estimate of 84 basis points.
For equities, a team led by David Kostin cut their year-end S&P 500 target to 6,200 points from 6,500, citing a dimmer outlook for economic growth and reflecting this year’s slump for the Magnificent Seven group of stocks. The new target implies an 11% gain from Tuesday’s close.
US markets have been volatile this year amid concerns that Trump’s proposed tariffs will stoke inflation and stall economic growth. But things have escalated rapidly this week. Levies of 25% on steel and aluminum imports came into force Wednesday, triggering an immediate reprisal from the European Union, while a flurry of headlines — including Trump threatening to double metals tariffs on Canada to 50% — have added to investor nervousness.
US investment-grade credit spreads widened to 94 basis points, the highest since September, on Tuesday, according to a Bloomberg index. Still, Goldman’s Karoui said that current spread levels are still too tight. “Since the first tariff headlines broke in early February, our message has been simple: add hedges and brace for some rebuild in premia,” he wrote in the note published on Tuesday.
As for US high-yield debt, the strategists now expect spreads to reach 440 basis points in the third quarter versus an earlier projection of 295 basis points. Junk-bond spreads are a good indicator of perceptions about the economy, with speculative-grade companies seen as less likely to default if the growth outlook is good, and investors therefore willing to accept a lower premium for the debt.