A recession in the US won’t necessarily spell bad news for stocks in the aftermath of their biggest annual decline since the global financial crisis, according to Goldman Sachs Group Inc.’s wealth-management business.

Sharmin Mossavar-Rahmani, chief investment officer of the unit, expects the S&P 500 to rebound as much as 12% in 2023 even in the event of a mild economic contraction as the index — which sank 19% last year — now largely reflects the risk of growth stalling.

“We’re not arguing that today’s valuations fully discount a recession,” Mossavar-Rahmani wrote in her 2023 outlook, co-authored with Brett Nelson, head of tactical asset allocation for the wealth group. “But considering last year’s equity drawdown, we do think a significant part of any valuation reset has already occurred.”

Their call is at odds with the view held by some top Wall Street strategists, who have warned that US stocks don’t fully reflect recession risks. Morgan Stanley’s Michael Wilson — one of the most vocal bears on the region’s equities — said this week the market is still underestimating the full impact of stunted growth and that stocks could slump another 22%, which would take them below last year’s troughs. He expects the S&P 500 to rise less than 2% in 2023.

US stocks have rallied in the new year amid bets that cooling inflation would prompt the Fed to ease the pace of rate hikes. Latest figures on Thursday showing a moderate increase in prices in December bolstered that optimism, although central bank officials have so far stuck to a hawkish rhetoric, saying rates will remain high until a more meaningful drop in inflation.

The Goldman wealth team assumes a 45%-55% chance of a US recession in 2023 and sets out three scenarios for markets depending on its timing and nature:

• Averted: a moderate-risk diversified portfolio of stocks and bonds would provide a total return of 9% for taxable clients.
• Occurs early in the year: equities would likely fall below last year’s lows, but bonds will hedge the portfolio. As the recession recedes, equities will rebound, delivering high-single-digit returns for a moderate-risk diversified portfolio.
• Lasts beyond 2023: stocks will likely end the year near the lows of 2022.

They also expect stock prices to remain resilient to any decline in corporate profits if the recession occurs early in the year, noting that in past bear markets, equities have typically bottomed six-to-nine months before earnings reach their low.

“Put simply, markets bottom when the news is still bad,” they said.

This article was provided by Bloomberg News.