Is the US headed for recession?

- Also: Find out whether big tech's rally is sustainable # # --------------------------------------------------------------- The key takeaways from today's edition: - Is the Fed done hiking? - Big tech's phoenix moment. - And we look at the rise and impact of activist investors. (Was this newsletter forwarded to you? [Sign up now]( --------------------------------------------------------------- What happens if the US government can't pay its bills? The U.S. debt limit day of reckoning may arrive sooner than expected. Treasury Secretary Janet Yellen warned this week that the U.S. could run out of cash as early as June 1 if Congress fails to raise or suspend the debt limit. While the actual deadline could still shift to late July as tax revenues trickle in, the Treasury's statement pulls forward the risk of a disruptive scramble between the parties in Congress to reach a deal, according to Alec Phillips, chief U.S. political economist for Goldman Sachs Research. The final debt limit deadline will be important because Congress is likely to reach a deal a day or so before the deadline — much as it did in 2011 and 2013 when the U.S. government was in a similar position, Phillips says on the latest episode of [Goldman Sachs Exchanges](. “This time around, the politics look similar,” he says. If the U.S. reaches the deadline without a deal, the risks for financial markets and the economy would mount quickly. Once the Treasury Department exhausts its resources, it would have to delay payments on its commitments, potentially affecting Social Security, Medicare and Medicaid, as well as pay and retirement benefits for the military, veterans and federal employees. “A lot of these things go out on a set schedule that's set years ahead of time based on the calendar and would be difficult to turn off quickly,” Phillips tells host Allison Nathan. Meanwhile, expect a “substantial increase in equity volatility” and a lot of “disruption in the Treasury curve,” Phillips says. The economic impact would also be large. “A delay of any more than a few days could be really damaging because you would just pull a lot of money out of the economy,” he says. “This is something that could certainly tip the economy into recession if it lasted for any period of time.” --------------------------------------------------------------- The Markets: Has the Fed overdone it? 🎙️ The Federal Reserve signaled this week that it's going to pause and evaluate before making further rate hikes, says Ashish Shah, chief investment officer of Public Investing at Goldman Sachs Asset Management. Financial markets, meanwhile, are trying to assess whether the central bank is really finished raising rates or is even considering cutting them to stabilize the economy and the financial system, Shah says in an episode of [The Markets from Goldman Sachs Exchanges](. The Fed may start cutting rates this year. “The bar for pivoting is going to be pretty high,” Shah says. It will be important to see how financial conditions shift, and the transmissions mechanisms for credit tightening are very hard to predict. A U.S. recession is becoming more likely. It's very difficult for policymakers to manage tightening credit conditions during a hiking cycle because credit contracts very slowly at first and then accelerates, he says. “The evolution of credit contraction through the balance of the year is something we're going to have to watch very carefully,” Shah adds. Banking system stress is the equivalent of a rate hike. The tightening of credit from stress in the banking sector is roughly similar to that of a 50-basis point hike, he says. “It's very likely the Fed would've continued to tighten had we not seen this level of contraction of credit,” he says.  Has the Fed hiked too much? “We're seeing those cracks within the system emerge, and how those cracks transmit into the real economy is going to be the question,” Shah says. “It's also entirely possible that the Fed is overtightened by 200 basis points compared to what is consistent with financial stability.” Debt limit concerns are evident in the Treasury market. The yield on bills that expire in June jumped by about 50 to 100 basis points when the Treasury said the debt ceiling needs to be raised by June 1. “Without question, there's credit stress being priced,” he says. Start your Friday mornings with our new [Markets podcast from Goldman Sachs Exchanges]( In just 10 minutes or less, we break down the key issues moving markets. Find us wherever you listen to podcasts. --------------------------------------------------------------- U.S. supply chain bottlenecks are nearly back to pre-pandemic levels While some measures of U.S. supply-chain congestion ticked up slightly this week, bottlenecks have eased dramatically since the strain peaked last year, Goldman Sachs Research analysts Jordan Alliger, Andrzej Tomczyk and Paul Stoddard write in a report. They say supply chain levels could soon be in line with those seen before March 2020. “Labor and equipment availability is improving alongside demand moderation,” they write.  --------------------------------------------------------------- Activist investors can boost returns — for now Activist investors launched 148 campaigns against 120 U.S. corporations last year, a 20% increase from 2021, Goldman Sachs Chief U.S. Equity Strategist David Kostin writes in the team's report. Our strategists analyzed more than 2,100 shareholder campaigns since 2006 where activists attempted to add value to companies listed on the Russell 3000 index. They examined the changes activist investors sought and the stock performance of the companies they targeted: - The median stock targeted by activist investors outperformed its sector by 3 percentage points in the week after the launch of a campaign. However, excess returns were short-lived and typically turned negative after six months. - And while 69% of targeted stocks outperformed during the first week, after one year the median stock lagged its sector by 5 percentage points; the average activist target, however, outperformed by 4 percentage points over that span. - An equal-weighted portfolio of all activist targets since 2006 has generated an average annual excess return relative to the Russell 3000 of 3 percentage points. Big companies could be targets for activists this proxy season As proxy season for many publicly traded companies kicked off last month, even the world's largest firms aren't immune to activist investors. “We're living in an environment right now where the GDP profile is uncertain. It's a harder economic environment. And these larger companies, I think, afford a little bit of defensive capabilities to the activists,” says Goldman Sachs' Avinash Mehrotra, co-head of M&A in the Americas and global head of the Activism and Shareholder Advisory and Takeover Defense Practices, on [Goldman Sachs Exchanges](. “They're drawn to companies that, in a more volatile economic environment, may be able to ride out that economic environment more soundly,” Mehrotra explains to host Allison Nathan. Volatile markets and falling valuations are also creating “fertile grounds” for activists, many of whom have raised substantial sums from investors in recent years, while the number of activists, especially first time or occasional activists, continues to grow, says Pamela Codo-Lotti, global chief operating officer of Activism and Shareholder Advisory. --------------------------------------------------------------- Big Tech reverses last year's losses: Can it last? Above (L to R): Ben Snider, Peter Callahan and Allison Nathan of Goldman Sachs After a disappointing performance in 2022, tech stocks are roaring back. With the results from first-quarter earnings so far, “the fundamentals have backed the stock moves,” says Peter Callahan, who covers the tech sector for the firm's Global Banking & Markets business. “You are moving into a cycle of positive earnings revisions,” Callahan says on the latest episode of the [Goldman Sachs ExchangesÂ](. Conditions are just about ideal for tech stocks, adds Ben Snider, a senior strategist in Goldman Sachs Research. “The sweet spot for the tech sector from a macro perspective is pretty weak growth — not recessions but weak growth that increases the scarcity value of these companies that can generate their own idiosyncratic growth without relying on the economy.” While some tech companies could feel near-term pressure if corporate IT spending weakens, the growing excitement around artificial intelligence may be a long-term tailwind, he adds. --------------------------------------------------------------- Briefings Brainteaser: Big Tech's bounceback After sizable declines in 2022, technology assets have rallied this year. Which of these categories has had the largest swing from stock market losses in 2022 to gains in 2023? A) Mega-capitalization technology B) Artificial intelligence C) Non-profitable technology D) Renewable energy [Check the answer here]( --------------------------------------------------------------- Goldman Sachs in the news [Fast Company]( May 2 [This $25 million fund is supercharging clean energy projects in the developing worldÂ]( [BloombergÂ]( 1 [Goldman Sachs' Salisbury on EM, recession, banks, private credit (8:32)]( [Yahoo! Finance]( 28 [Market madness ‘bringing the best of Goldman Sachs,' Goldman Sachs global head of talent saysÂ]( [Fast CompanyÂ]( 27 [Why engineers need a seat at the leadership table, according to the CIO of Goldman Sachs]( --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. 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