Goldman Sachs lowered its probability of a U.S. recession over the next 12 months to 25% from 30% in a closely watched mid-year outlook released Monday, arguing that the American economy has remained more resilient than expected despite rising oil prices, persistent inflation pressures, and the ongoing Iran conflict.
But the bank simultaneously pushed back the timing of its next expected Federal Reserve rate cut — a sign that even as recession fears ease, Wall Street is increasingly accepting that higher interest rates may remain in place much longer than previously anticipated.
The revised forecast gained immediate scrutiny Tuesday morning after the Bureau of Labor Statistics reported that April inflation accelerated to 3.8% year-over-year, the highest annual reading since May 2023.
The combination of slowing recession fears alongside resurgent inflation is creating a far more complicated environment for investors and policymakers alike.
In its updated outlook, Goldman’s economics team led by Chief Economist Jan Hatzius said the firm now expects the Federal Reserve to deliver its next quarter-point rate cut in December 2026, followed by another reduction in March 2027.
That marks a significant shift from Goldman’s prior forecast, which projected rate cuts beginning in September of this year.
The bank said the change reflects “lower recession risk and higher near-term core PCE inflation,” while maintaining a year-end 2026 inflation forecast well above the Federal Reserve’s 2% target.
The revision represents one of the most important Wall Street recalibrations since the Iran crisis erupted in late February and energy markets were thrown into turmoil following disruptions surrounding the Strait of Hormuz.
Back in March, Goldman had actually increased recession odds from 25% to 30% after oil prices surged sharply following the outbreak of the conflict. At the time, the bank’s commodities analysts projected the energy shock would likely prove temporary, assuming only several weeks of supply disruption.
Instead, oil market disruptions have continued for more than two months.
On Tuesday morning, WTI crude traded above $102 a barrel while Brent crude surpassed $103, levels that continue placing upward pressure on transportation, manufacturing, freight, and consumer prices throughout the global economy.
Despite that, Goldman argued the broader U.S. economy has remained remarkably durable.
April payroll data showed the economy added 115,000 jobs, far exceeding consensus expectations, while unemployment held steady at 4.3%. Initial jobless claims also remained relatively contained, reinforcing the view that the labor market has not meaningfully weakened despite higher borrowing costs and elevated inflation.
The bank also pointed to resilient private domestic demand and relatively healthy household balance sheets as reasons recession risks have moderated.
Still, Goldman acknowledged several warning signs are beginning to emerge.
The firm warned consumer spending could slow later this year as tax-refund spending fades, gasoline prices continue rising, and wage growth gradually cools.
The revised outlook also leaves Goldman increasingly closer to — though still less hawkish than — Bank of America, which this week projected the Federal Reserve may not cut rates until July 2027.
Markets themselves have shifted even more aggressively.
According to the CME FedWatch Tool, traders now assign virtually no probability to Fed rate cuts for the remainder of 2026. Prediction markets have also begun pricing growing odds that the Fed’s next move could ultimately be another rate hike if inflation continues accelerating.
Goldman, however, pushed back against the most aggressive hawkish scenarios, arguing the Federal Reserve may still look through some of the inflation tied directly to energy disruptions and geopolitical supply shocks.
That assumption is increasingly being tested daily as the Strait of Hormuz remains heavily restricted and global oil markets continue operating under severe uncertainty.
The outlook also arrives amid growing disagreement among Wall Street’s biggest institutions over the future direction of markets.
Earlier this week, JPMorgan Private Bank told clients “the AI supercycle may just be getting started,” while JPMorgan Chase Chief Executive Jamie Dimon separately warned there is now “too much exuberance” in financial markets given inflation and geopolitical risks.
Meanwhile, Goldman Sachs Chief Executive David Solomon has continued forecasting a strong environment for mergers, acquisitions, and corporate investment activity fueled by artificial intelligence spending and resilient economic demand.
The implications for investors now stretch across virtually every major asset class.
The 10-year Treasury yield climbed to 4.43% Tuesday morning as traders demanded higher compensation for inflation risk. Technology and growth stocks weakened, with the Nasdaq Composite falling nearly 1%, while energy and defensive sectors outperformed.
Goldman strategists said bonds — particularly shorter-duration Treasuries — may increasingly serve as an effective hedge against either a delayed recession or a reversal in the AI-driven equity rally that has dominated markets throughout much of the year.
The next major tests for the bank’s outlook arrive quickly.
Investors are now preparing for the release of:
- April Producer Price Index data Wednesday,
- April Retail Sales Thursday,
- and the latest Federal Reserve meeting minutes on May 20.
Any further acceleration in inflation could force Wall Street to push expectations for Fed easing even further into 2027 — bringing Goldman’s outlook closer to the increasingly hawkish forecasts now emerging across the Street.
For now, the market’s central question has shifted dramatically:
not whether the U.S. economy will slow — but whether inflation can cool before higher interest rates themselves become the next major economic shock.
JBizNews Desk
© JBizNews.com. All rights reserved.
