Goldman Sachs Warns of Market Shock as Tariff Uncertainty Rises, U.S. GDP Growth Forecast Cut by 0.7%

Goldman Sachs has issued a warning about the potential for a significant market shock as expectations for tariff rates rise. The financial institution has highlighted that the uncertainty surrounding tariffs is disrupting the predictability of corporate earnings, supply chain costs, and global market demand. This unpredictability is making it challenging for firms to plan for expansion and new hiring, leading to a shift in investor behavior.

Investors are increasingly demanding higher returns for holding riskier assets, such as equities, particularly in sectors that rely heavily on international trade. As a result, there has been a movement towards defensive stocks, such as utilities or healthcare, as well as safe-haven assets like gold. The frequent shifts in trade policy are contributing to an unstable business environment, where markets no longer react positively to pro-trade announcements as they once did. This erosion of trust has led to a deepening skepticism about the possibility of de-escalation in trade tensions.

Goldman Sachs has also revised its U.S. GDP growth forecast for 2025, lowering it by 0.7 percentage points to 1.7%. This adjustment reflects the adverse effects of tariffs and trade policy shifts introduced by the Trump administration. The U.S. runs a persistent trade deficit, importing more goods and services than it exports. This imbalance is driven by the unique role of the U.S. economy, where the U.S. dollar serves as the world’s primary reserve currency, creating international demand for U.S. financial assets. Trump’s tariffs aim to reduce the trade deficit but risk unintended consequences, such as higher import prices and retaliatory measures that could further increase the trade deficit.

The U.S. Consumer Sentiment Index has fallen to a two-year low, indicating growing pessimism among consumers about the economy. This decline is attributed to concerns about tariff policies, rising inflation expectations, and overall economic uncertainty. Despite low sentiment, consumer spending has remained resilient, especially among high-income households. However, lower-income consumers are facing more significant challenges, with housing costs consuming nearly half of their disposable income. Continued pessimism could eventually lead to reduced discretionary spending, particularly on travel, homes, and cars.

Several key economic indicators will be important in assessing potential economic problems. The Consumer Sentiment Index will be a critical barometer of public confidence and spending behavior. Inflation expectations, both short-term and long-term, influence consumer behavior and Federal Reserve policy decisions. The GDP growth rate is also an important indicator, with recent projections indicating potential negative growth for the first quarter of 2025, raising concerns about overall economic health. The yield curve, a historically reliable recession predictor, remains flat but has shown signs of inversion in recent months—a pattern that has preceded every U.S. recession in the past five decades. Rising tariffs and protectionist trade policies drive up costs for businesses and consumers, fueling inflationary pressures and slowing global trade.