Goldman Sachs analysts have downplayed the risk of a steep market downturn following the U.S. presidential election, despite potential election-related volatility. They see only an 18% chance that the S&P 500 will fall by more than 20%, which would signal the start of a bear market. The analysts believe that the ongoing strength of the U.S. economy provides a solid foundation for the market to weather any short-term turbulence.
“Despite recent weaker macro data, including the impact of strikes and hurricanes, the overall favorable U.S. macro backdrop should limit the risk of a bear market,” the analysts wrote in a note published Monday. They pointed out that stocks have been supported by solid economic fundamentals, which have driven gains throughout the year.
Goldman Sachs noted that even if bond yields rise significantly after the election, the stock market should remain resilient. However, they warned that a rapid increase in bond yields, or an increase in real yields (adjusted for inflation), could pose a more substantial risk to equities. “Equities should be able to digest higher bond yields as long as they are driven by stronger economic growth. But rising bond yields might eventually become a limiting factor for stocks if they outpace real GDP growth or if the increases are too swift,” the analysts cautioned.
One potential scenario that could drive higher bond yields is a victory for Republican nominee Donald Trump, whose economic proposals—such as sweeping tariffs and mass deportations—are expected to be inflationary. These policies could make it more difficult for the Federal Reserve to continue its current accommodative monetary policy, raising the likelihood of higher yields. Conversely, a Kamala Harris win, particularly with a divided Congress, could lead to lower bond yields, according to Goldman’s analysis.
While the Federal Reserve delivered a significant rate cut in September, expectations are that it will trim rates by 25 basis points again at its meeting on Thursday. However, uncertainty surrounds the path of future rate cuts, with some strategists predicting the Fed could pause its easing cycle in December or early next year. Some also still see the possibility of another large rate cut if economic conditions worsen and the labor market weakens.
Despite rising bond yields, stocks have managed to perform well, with the S&P 500 up more than 21% this year, marking the continuation of a two-year bull market. Goldman Sachs analysts remain optimistic that the market can avoid a bear market, even if election-related volatility creates short-term uncertainty.
With Vice President Kamala Harris and former President Donald Trump virtually tied in the final polls, investors are bracing for the possibility of market volatility if the election results remain unclear for several days. However, Goldman Sachs believes that the broader economic environment will help support the market through the uncertainty.
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