Special Episode: What the American Rescue Plan Means for the Economy, Markets, Corporations and Investors

Episode Summary

Executive Summary: Goldman Sachs’ panel assessed the $1.9T American Rescue Plan and concluded it should materially lift 2021 growth, accelerate reopening trends, and support risk assets, while also reshaping fiscal policy expectations through a likely extension of child tax credits and some unemployment aid. Speakers argued stimulus will boost consumption, M&A, issuance, and cyclical/value sectors, but may also intensify inflation, rate, and tax-reform debates.

Main Topics: Economic impact of the American Rescue Plan (Priority: 5/5): Alec Phillips said the final package was close to expectations but slightly larger than Goldman forecast, with most support coming from direct payments, child tax credits, state/local aid, schools, and unemployment benefits. Longer-term fiscal policy and tax changes (Priority: 5/5): The expansion of the child tax credit may become semi-permanent, while future infrastructure spending is expected to be partially financed by corporate tax and capital gains increases, though likely not at the most aggressive campaign levels. Growth outlook, unemployment, and deficit financing (Priority: 4/5): Goldman raised its macro assumptions, expecting stronger 2021 GDP growth and faster unemployment declines, while noting higher debt loads are manageable unless rates rise sharply over time. Market rotation, retail participation, and inflation risks (Priority: 5/5): Amelia Garnett argued the market rally has shifted from pandemic winners to reopening/value beneficiaries, with retail flows and stimulus checks adding volatility and inflation concerns especially in commodities and rates. Corporate financing, M&A, and equity issuance (Priority: 4/5): Susie Schur said stimulus and recovery are improving CEO confidence, increasing M&A and financing activity, and driving robust debt and especially equity issuance, including a very active IPO/SPAC market. Fixed income, credit, and municipal markets (Priority: 4/5): Ashish Shah explained that steeper curves favor credit and floating-rate assets, while $350B in state and local aid should strengthen muni balance sheets, improve ratings, and reduce issuance.

Key Arguments: The American Rescue Plan was broadly in line with expectations but somewhat larger, making its near-term growth impulse slightly more powerful than Goldman had forecast. The child tax credit expansion is the most important long-term fiscal development because periodic payments create pressure for extension beyond 2021. Infrastructure is likely to be a major second fiscal package, but unlike the rescue plan it will be spread over years and may include pay-fors such as corporate and capital gains tax increases. Goldman expects 8% U.S. Q4/Q4 growth in 2021 and 2.9% in 2022, above consensus, with unemployment falling to 4% by end-2021 and 3.5% by end-2022. Rising rates are a concern, but Treasury financing is cushioned by long average maturity; higher interest costs would only gradually feed through to the budget. Market leadership has rotated from large-cap tech/growth beneficiaries of low rates to value and cyclical reopening names since vaccine news. Retail participation is now a major market force, and stimulus checks could further amplify trading in popular names and volatility pockets. Inflation risks are viewed as real, particularly in commodities, because underinvestment in old-economy supply and stronger demand can drive price increases. Corporate clients are using favorable conditions to pull forward financing, lock in low rates, and pursue more M&A and equity issuance. Municipal aid will improve state and local credit quality, support spending on schools, healthcare, and transit, and likely reduce muni supply. For fixed income investors, steep yield curves and strong credit conditions create opportunities in bank loans, high yield, and emerging markets. The Fed’s commitment to low rates and average-inflation targeting should remain supportive for risk assets and portfolios.

Data Points: American Rescue Plan size: $1.84 trillion - Final package size cited by Alec Phillips; described as just under 8.5% of GDP Forecast vs passed stimulus: $1.5 trillion forecast vs $1.84 trillion passed - Goldman’s prior assumption was smaller than the enacted bill Individuals + child tax credit: Just over $500 billion - Biggest component of the rescue package State and local aid: $350 billion - Large portion of the bill, but spending will take time to flow through Schools funding: $170 billion - Additional support on top of state/local aid Unemployment benefits: $300 per week extension through September - Expanded benefits and eligibility cited as notable support Child tax credit: Maximum increased from $2,000 to $3,600 per child - Major policy change highlighted as likely to persist Potential long-term cost of CTC extension: More than $100 billion per year - Goldman assumes extension in fiscal forecasts Infrastructure assumption: A little more than $100 billion next year - Placeholder assumption in Goldman’s forecast U.S. GDP growth forecast for 2021: 8% Q4/Q4 - Goldman’s forecast after stimulus and recovery assumptions Consensus 2021 GDP growth forecast: 6% Q4/Q4 - Goldman is above consensus U.S. GDP growth forecast for 2022: 2.9% - Goldman’s 2022 forecast Consensus 2022 GDP growth forecast: 2.6% - Goldman is slightly above consensus Unemployment forecast end-2021: 4.0% - Expected unemployment rate by year-end 2021 Unemployment forecast end-2022: 3.5% - Expected unemployment rate by year-end 2022 Market rotation performance: Value basket outperformed growth basket by 25% since Nov. 9 vaccine headlines - Amelia’s evidence of the growth-to-value rotation Stimulus checks to households: Around $400 billion - Expected direct payments hitting wallets over the next few weeks Retail trading volume share: Almost as much volume as mutual funds and hedge funds combined - Amelia’s description of retail market influence Corporate financing market: U.S. supply up to $400 billion year to date, +32% YoY - Susie’s update on debt issuance Equity issuance: Nearly 700 equity deals for $212 billion - Year-to-date issuance volume cited by Susie Equity issuance last year comparable period: 200 equity deals for $54.4 billion - Used as the prior-year benchmark IPO market: 65% of 2020 volume - Current IPO activity as of the transcript date M&A volume 2020: $93 billion - Depressed year for M&A due to COVID uncertainty M&A volume average: $230 billion annually - Five-year average cited by Susie M&A in first two months of 2021: $30 billion - Early sign of activity rebounding IG index all-in financing levels: Around 2.25 - Ashish cited this as close to all-time tights IG spread distance from lows: 50 basis points - How close current levels are to historic lows Muni aid: $350 billion - Supports state and local balance sheets and spending

Pivotal Quotes: "The final package came in at 1.84 trillion, so just under 8.5% of GDP, a little less than the 1.9 he'd called for, but pretty similar." — Alec Phillips: On how the enacted rescue plan compared with expectations "The novel development here is that the Treasury would be sending checks out or payments out on a periodic basis... And once they start doing that, my guess is that there's going to be a lot of pressure to continue doing it." — Alec Phillips: On why the expanded child tax credit could become enduring fiscal policy "The composition of the rally is wildly different." — Amelia Garnett: On how the post-COVID market rally changed from pandemic winners to reopening/value names

Implications: The panel sees 2021 as a strong rebound year for growth, risk assets, and corporate activity, but with rising inflation, rates, and taxes as the main medium-term risks. Investors should favor reopening, cyclicals, credit, and select munis while watching policy and valuation shifts.