Markets may still be underestimating the risk of a full-blown U.S. recession following the sharp escalation in tariffs on Chinese goods, Goldman Sachs analyst said in a note.

In the wake of the tariff announcement, U.S. markets experienced one of the largest two-day growth downgrades in decades, with implied GDP growth expectations dropping by 130 basis points—on par with shocks seen during COVID, the global financial crisis, and Black Monday in 1987, analysts said.

Despite the massive selloff on Wall Street on April 3 and April 4, Goldman Sachs noted that markets have yet to fully price in a typical recession scenario.

"Among common recession gauges, only the VIX is at levels associated with past recession peaks: longer-dated equity volatility, credit spreads and the yield curve are not," Goldman Sachs analysts said in a note.

"We think there is a high chance that we continue to push toward full recession pricing, which would imply weaker equities, wider credit spreads, a deeper Fed cutting cycle and higher longer-dated equity volatility," they added.

Analysts said that the most direct path to recovery would be a significant reversal in trade policy, as current pricing and macro signals do not yet offer a floor against downside risks.

Source: Investing.com