Update on US Growth and Earnings Forecasts, and Expected Stimulus Programs

Episode Summary

Executive Summary: Goldman Sachs economists and strategists assessed a rapidly worsening COVID-era U.S. outlook, highlighting a nearly $1.4–$1.6T fiscal package, a historic GDP contraction in Q2, a sharp rise in unemployment, and a steep 2020 earnings decline. They argued stimulus and Fed actions should stabilize credit markets and support a 2021 rebound, but near-term risks to growth, inflation, and equities remain severe.

Main Topics: U.S. fiscal stimulus package (Priority: 5/5): Alec Phillips outlined the evolving Senate bill, including small-business lending, industry-specific support, direct household aid, unemployment enhancements, and possible additional state/local and health-care relief. He emphasized the package’s large headline size but noted some provisions are guarantees or multi-year and may overstate immediate demand stimulus. Sharp U.S. GDP downgrade (Priority: 5/5): David Mericle explained Goldman’s revised forecast for a historic contraction driven by lost services activity, reduced construction, and manufacturing disruptions. He said the downturn is concentrated in Q2, with gradual normalization later in the year as virus drag fades and activity resumes. Labor market deterioration (Priority: 5/5): The economists described an unusually fast labor-market shock, with weekly claims likely hitting record levels and unemployment peaking far above normal recession patterns. Policy support may cushion layoffs, but the near-term rise in joblessness is expected to be severe. Equity earnings reset and market path (Priority: 5/5): David Kostin said S&P 500 earnings estimates were cut again, reflecting the speed of the economic collapse. He argued markets likely need further downside before recovering, as investors wait for clearer earnings visibility and evidence that virus cases are peaking. Fed response and credit-market stabilization (Priority: 4/5): The discussion covered the Federal Reserve’s new credit facilities for corporate markets and the expectation that legislation will expand the Fed’s capacity. The goal is to keep debt markets functioning and limit second-order financial stress. Global recession and regional differences (Priority: 4/5): Jan Hatzius put the U.S. outlook in global context, noting similarly abrupt stops across Europe, Canada, and Australia, while China had already suffered a large Q1 decline. Global growth was forecast to turn negative for 2020, with the downturn front-loaded into the first half of the year. Inflation and downside scenarios (Priority: 3/5): The team discussed likely near-term disinflation from collapsing demand, especially in travel and hospitality, while noting measurement challenges if services disappear entirely. They also considered extreme downside scenarios, such as prolonged shutdowns or a second wave of infections, which would materially worsen the outlook.

Key Arguments: The fiscal package is large enough to materially support the economy, but its true stimulus effect is smaller than the headline because some funds are guarantees and some spending will occur over multiple years. Small-business lending, airline support, and the Treasury’s Exchange Stabilization Fund are central elements of the bill, but Democrats may push for added state/local and health-care aid. Goldman’s U.S. GDP forecast assumes a severe but temporary shock, with the deepest decline in Q2 and a gradual recovery afterward as virus-related drag fades. The labor market shock is unprecedented in speed, with millions of claims likely and unemployment expected to rise substantially before improving. Equity markets are likely to remain volatile and could fall further before recovering because earnings estimates still need to reset and investor positioning remains elevated relative to historical troughs. The Fed’s actions should help preserve functioning corporate credit markets, which is critical for preventing the downturn from turning into a broader financial crisis. Global growth is contracting across most major economies, but the shock is especially concentrated in the second quarter outside Asia and China. Inflation is likely to be disinflationary in the near term because demand destruction dominates, though supply disruptions and measurement issues complicate the picture.

Data Points: Fiscal package size: 7% of GDP / about $1.4T–$1.5T - Alec Phillips said the Senate package appeared to be in this range, with potential additions pushing it to $1.5T–$1.6T. Small business facility: ~$300B - Loan and loan-forgiveness program for firms with fewer than 500 employees, based on payroll expense. Airline / aerospace support: $75B total - $50B for airlines, $8B for air cargo, and $17B for aerospace via loans and guarantees. Treasury Exchange Stabilization Fund allocation: $425B - Funds to capitalize facilities under Treasury/Fed authority; seen as controversial due to broad discretion. Direct household payment: $1,200 per adult - Individual tax rebate with income limits of $75,000 for individuals and $150,000 for couples. Unemployment supplement: +$6,000 per week - Added to standard unemployment benefits under the bill, according to the transcript. 2020 U.S. GDP forecast: -3.8% - Full-year annual average growth forecast after revisions. Q1 GDP forecast: -6% annualized - Goldman’s revised quarterly annualized U.S. growth estimate. Q2 GDP forecast: -24% annualized - Expected trough in the shutdown-driven contraction. Q3 GDP forecast: +12% annualized - Expected rebound as restrictions ease and stimulus supports activity. Q4 GDP forecast: +10% annualized - Continuation of recovery into year-end. Estimated GDP hit by April: nearly 10% reduction in level of GDP - Derived from services, construction, and manufacturing shocks. Virus drag normalization: 10% fades each month - Assumption used to model gradual recovery without assuming a medical breakthrough. Weekly jobless claims: ~2.25 million - Goldman’s estimate for the week’s filings based on state-level reports. Unemployment rate peak: around 9% - Expected peak, about 5.5 percentage points higher than before the crisis. S&P 500 earnings decline: -33% in 2020 - David Kostin’s revised forecast versus 2019. S&P 500 earnings per share: $165 in 2019 / $110 in 2020 / $170 in 2021 - Illustrates the sharp drop this year and expected rebound next year. S&P 500 level: ~2,000 near-term; 3,000 year-end 2020 - Near-term downside target versus year-end recovery target. Market decline already experienced: -32% in a month - Used to illustrate the speed of the selloff in U.S. equities. Realized market volatility: ~6% average daily moves in March - Compared with prior crisis-era volatility, highlighting extreme conditions. Global growth forecast: -1% in 2020 - Jan Hatzius’ top-down global growth estimate. China Q1 GDP: -42% quarter-on-quarter annualized - Described as a special case with a large first-quarter hit.

Pivotal Quotes: "We're now looking for a 33 percent decline for earnings in 2020 compared with 2019." — David Kostin: Explaining the scale of the S&P 500 earnings revision and its implications for equity valuation. "That Q2 number is 2.5 times the worst number we have seen in a quarter in the modern history of the U.S. national accounts." — David Mericle: Describing the severity of the expected GDP contraction in the second quarter. "The driver of the equity market is likely to be entirely focused on the virus and whether the number of cases that are reported are likely to eventually decelerate and turn down." — David Kostin: On what investors will watch most closely, including the potential inflection point for markets.

Implications: Expect continued volatility, deep near-term recessionary conditions, and a likely further reset in earnings and valuations. Policy support may prevent a financial crisis and set up recovery, but timing depends on virus containment and reopening progress.