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The stock market looks like it’s in an ideal setup in the latter half of this year, Goldman Sachs said.
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But the bank still sees three risks that could upend a rally in the coming months.
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Strategists pointed to headwinds related to economic growth, inflation, and the US dollar.
The stock market is looking just right to investors at the moment, but it might not stay that way all year, according to strategists at Goldman Sachs.
In a note to clients on Wednesday, the investment bank said it believes investors were already pricing in a “Goldilocks” scenario, an ideal situation for stocks where economic growth isn’t too hot or too cold.
Yet, investors hoping for the market to rally higher aren’t in the clear, strategists said, pointing to a handful of risks looming in the second half of the year that could easily dispel the just-perfect market environment.
“Markets have shifted back towards pricing a ‘Goldilocks’ backdrop, helped by more dovish Fed expectations and a resilient macro backdrop,” strategists wrote. “While we see support from fiscal and monetary easing into next year, we still expect a worsening growth/inflation mix in 2H and elevated risk appetite increases risk of disappointments.”
Here are three risks the bank is eyeing for the second half of the year.
1. An economic growth shock, stagflation
Investors look like they’re pricing in stable economic growth, but President Donald Trump’s tariffs could still push the US into a slowdown, the bank said.
“Our economists’ baseline for 2H continues to point to a deteriorating growth/inflation mix due to the tariff impacts — applying their forecasts to our US business cycle scores points to a somewhat stagflationary macro backdrop for the rest of the year,” strategists said, later adding that the slowdown increased the “drawdown risk” for stocks.
Stagflation is a scenario in which growth remains sluggish while inflation is elevated. That dynamic is thought to be even worse than a traditional recession, when policymakers can easily cut interest rates to boost the economy.
While global growth expectations have strengthened in recent months, the potential for macro surprises to hit the US economy has worsened this year as Trump has ironed out his tariff policy, according to Goldman’s analysis.
2. An interest rate shock
Tariffs are also thought be inflationary, something that could raise the risk of an interest rate shock in the US.
That’s because the Fed, which has said it would keep an eye on how tariffs impact inflation, could potentially take rates higher, which would hit risk assets like stocks.
“If a tariff-induced slowdown is averted and inflation picks up, there is risk of renewed upward pressure on rates, which can also feed back into risky assets,” the bank said.
Investors are largely expecting interest rates to drift lower into the end of the year, but have pulled back their hopes for steeper rate cuts. Markets are now pricing in a 67% chance the Fed will trim rates two to three more times in 2025, according to the CME FedWatch tool.
3. Further declines for the US dollar
The US dollar has been mired in a decline for most of 2025. The US Dollar Index, which weighs the greenback against a basket of foreign currencies, has fallen 10% year-to-date.
In the past, a weaker dollar has led investors to increase their appetite for risk assets like stocks.
“However, now a weaker Dollar reflects risks to US exceptionalism from stagflationary effects due to tariffs, as well as concerns
about fiscal policy risks and Fed independence,” strategists said, referring to worries that US assets will no longer dominate the world market.
Volatility in the US dollar has also contributed more to portfolio volatility in recent months, according to Goldman’s analysis of multi-asset portfolios around the world.
“Investors need to manage risk of more Dollar downside with a larger proportion of multi-asset portfolio risk driven by FX risk,” strategists said.
Read the original article on Business Insider
