Goldman Sachs Warns of U.S. Public Debt Risks, High Asset Valuations

Goldman Sachs has identified the core risks facing the U.S. market and economy, shifting focus from private sector financial excesses to the escalating public debt burden and elevated asset valuations. The firm highlights that while private sector financial imbalances remain relatively low, the primary concern lies in the potential for uncontrolled growth in public debt and corresponding interest payments. This scenario could lead to significant economic and market instability, as the increasing debt levels and interest expenses strain government finances and potentially crowd out private investment. The firm's analysis underscores the need for prudent fiscal management to mitigate these risks and ensure long-term economic stability.

Despite high valuations in the real estate sector, the financial imbalance risk in the private sector, including households and businesses, remains relatively low. In contrast, the fiscal condition of the public sector poses a more significant medium to long-term threat. If debt and interest payments grow uncontrollably, the U.S. will face severe challenges in fiscal sustainability. This potential risk could drive up interest rates, tighten the overall financial environment, and hinder economic growth.

The report emphasizes that the U.S. faces its most significant long-term challenge in fiscal sustainability. If the national debt and corresponding interest payments grow to a sufficiently large extent, maintaining a stable debt-to-GDP ratio would require the government to sustain large fiscal surpluses over the long term, which is politically unsustainable. While it is difficult to predict when the market will become more concerned about this issue, any resulting upward pressure on interest rates could tighten the broader financial environment and impede economic growth. This impact could be more destructive given the already high asset valuations.

Despite high interest rates and increased geopolitical uncertainty, U.S. stock market valuations remain at their highest levels since the late 1990s. The firm's investment portfolio strategy model predicts a reasonable price-to-earnings (P/E) ratio of 20.7 times, while the current actual level is 22.4 times, significantly higher than the average of 15.9 times since 1990. Additionally, the firm's speculative trading index indicates elevated current risks, with phenomena such as "Meme stock" trading signaling a high market risk appetite.

While the firm's monitoring indicators show that high housing prices pose some risk, the economic team is not overly concerned. They attribute the current high housing prices primarily to the persistent supply-demand imbalance in single-family homes, rather than lax lending standards or speculative purchases, which could lead to genuine financial stability issues. The report predicts that the shortage of single-family homes may persist for some time, limiting the risk of a significant drop in housing prices. Furthermore, data indicates that loose credit is not the main driver of the current housing price increase, as the median credit score of borrowers at the time of mortgage issuance remains slightly higher than pre-pandemic levels.

Regarding household debt, the report addresses two major concerns. In terms of corporate debt, although corporate interest expenses have risen significantly in recent years, the impact so far appears limited. The firm estimates that refinancing maturing debt will increase interest expenses by only 3% over the next two years, far below the 7% estimated for 2023. This is primarily due to a large amount of debt already refinanced in a high-interest rate environment, and corporate bond yields have recently fallen sharply.