Goldman CEO: A 'very reasonable possibility' the economy enters recession next year

Goldman Sachs (GS) CEO David Solomon expects the stock market's slide to continue in 2023 and thinks the odds of a recession hitting the U.S. economy are about 2-out-of-3.

Speaking at the Wall Street Journal's CEO Council Summit on Tuesday, Solomon said he expects stocks will be lower, along with oil and real estate (both commercial and residential), while the U.S. dollar is poised to rise slightly next year.

Meanwhile, Solomon placed the probability of a "soft landing" — or a slowdown in inflation that doesn't tip the economy into recession — for the U.S. economy at only 35%.

"I would define a soft landing as we get inflation back close to 4% inflation, maybe we have a 5% terminal rate and we have 1% growth," Solomon said. "I think there's a reasonable possibility we could navigate a scenario like that."

"But I also think there's a very reasonable possibility that we could have a recession of some kind," Solomon added.

Solomon's personal view reflects noticeably less optimism than the consensus forecasts of economists at his firm, who see the U.S. economy “narrowly avoiding” a recession and stocks closing flat next year.

The firm's equity strategy team led by David Kostin said in its year-ahead outlook published last month they expect the S&P 500 will finish 2023 at 4,000. The benchmark index closed at 3,941 on Tuesday.

When asked about the 10-year Treasury yield in a Q&A at the end of his interview, Solomon said his view depends on whether or not an economic downturn can be avoided.

“As opposed to giving you a number, if you listen to my view, we’ve got a yield curve that if you normalize — if you get that soft landing — you’ll see that 10-year Treasury yield higher,” Solomon said. “If you don’t get that soft landing, you’re going to see a reversal of policy, and then you can see rates the same or lower.”

It is unsurprising, according to Solomon, to be in a period of higher rates as the Federal Reserve attempts to bring down inflation caused by extensive fiscal stimulus and the "black swan" effects of war in Eastern Europe.

“The market is making an assumption that we’ll reach the terminal rate sometime soon and the [Fed] will bring rates back down, and if you look at most tightening cycles, historically, after some period of time, you do see a reversal,” Solomon said. “But I think we're still early in this – I think it's uncertain.”

Goldman Sachs forecasts the U.S. central bank’s key policy rate, the federal funds rate, to peak at 5% to 5.25% around mid-next year.

However, economists at the investment bank do not expect the Federal Reserve to begin cutting interest rates in 2023.

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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