Is the US stock market falling another 25%?

Yesterday, the U.S. stock market concluded several days of consecutive gains, with the Nasdaq's decline exceeding 2%. Prior to this, Europe and Asia had seen increases, making the U.S. stock market's downturn appear quite "unconventional." More worryingly, Goldman Sachs warned investors that the risk of a U.S. recession next year is far greater than previously anticipated, suggesting that the S&P 500 index could potentially fall an additional 25% from its current level.

Given the increasing risks in the U.S. stock market, funds seeking safety have begun to flow back into gold, leading to a significant rise in international gold prices recently. A week ago, the international gold price had reached a low of $1,621.1 per ounce, but it then experienced a strong rebound. After several consecutive days of gains, the international gold price has now returned to the $1,670 threshold.

The rise in gold prices is primarily due to two reasons. First, as it is anticipated that the Federal Reserve will have to slow down the pace of interest rate hikes, the U.S. Dollar Index has retreated, supporting the rise in gold prices. Second, some investors who are ahead of the curve have begun to realize that the likelihood of the U.S. economy falling into recession is growing, and out of a need for risk aversion, funds are starting to take long positions in gold.

Due to the significant outflow of funds from ETFs previously, and now with the U.S. Dollar Index potentially nearing its peak and the risk of U.S. recession increasing, a considerable amount of funds are flowing back into gold. It is believed that more funds will be needed to replenish gold positions in the future.Additionally, current data models indicate that the pace of interest rate hikes in the United States will slow down. The probability of a 50 basis point rate hike in November has surpassed 10% for the first time, reaching 12.5%. Previously, a 75 basis point rate hike in November was considered a certainty, but now this probability has dropped to 87.5%. Looking back at the trend in 2018, we found that four months after gold bottomed out, the Federal Reserve's interest rate hike cycle came to an end. Therefore, Goldman Sachs predicts that gold is once again falling to the bottom of this round of adjustments, after which gold will slowly rise, and then the Federal Reserve's interest rate hike cycle will stop, and gold will begin to accelerate its upward momentum. Once the Federal Reserve is forced by economic pressure to announce a rate cut, the next big rise in gold is just around the corner.

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While gold prices are rising, the U.S. stock market is waiting for further declines. A few days ago, the U.S. stock market experienced a certain degree of rebound. About half a month ago, the S&P Index rebounded from its lowest point of 3490 to a high of 3886 yesterday during trading, with a gain of over 11%.During this period, the upward trend in U.S. Treasury yields seems to have eased, with both the two-year and ten-year Treasury yields experiencing a certain decline.

However, Goldman Sachs warns investors that the rebound is entirely due to bets on potential changes by the Federal Reserve, and the real economic situation has not changed significantly.

Goldman Sachs strategists point out that if the U.S. economy really goes into recession, U.S. stocks will continue to fall. The S&P 500 index may drop another 25% from its current level, breaking below 2,900 points.

Looking back at the early outbreak of the COVID-19 pandemic in 2020, the S&P 500 index once "easily" fell below 2,200 points, and it seems not very difficult for the S&P 500 index to break below 2,900 points in the future.

As more and more people in the market see signs of economic recession, the selling pressure on U.S. stocks will increase. At that time, selling U.S. stocks and buying gold may become an inevitable choice for many investors.