May 13 2024: Analysts at Goldman Sachs and Wolfe Research are raising concerns about the trajectory of U.S. federal debt, citing potential long-term risks for the markets.
Goldman Sachs’ Assessment: Goldman Sachs provided investors with a cautious outlook, noting that while the fiscal outlook is “not good, but a little better,” the federal budget deficit is expected to hover around $1.8 trillion this year, slightly higher than previous estimates.
The bank highlighted underlying improvements in the primary deficit, which is set to decrease by 2% of GDP from the prior year. However, rising interest expenses and complexities related to student loan policies remain challenges.
Looking ahead, Goldman Sachs anticipates a gradual decrease in the primary deficit over the coming years, although interest expenses are projected to continue rising. The upcoming election could also influence the medium-term fiscal landscape, albeit with potential adjustments rather than dramatic shifts in policy.
Wolfe Research’s Warning: Wolfe Research echoed concerns about the federal debt’s long-term impact on markets, emphasizing that fiscal tailwinds have contributed to economic growth and stock market gains post-pandemic.
The firm highlighted various factors supporting economic trends, such as transfer payments, infrastructure spending, and legislative acts like the CHIPS Act and the IRA. However, despite these positive drivers, Wolfe Research flagged the alarming trajectory of U.S. federal debt as a major concern.
According to the Congressional Budget Office (CBO), publicly held federal debt is on track to reach historic highs by 2029, surpassing levels seen after World War II. This unsustainable trajectory poses significant risks for the economy and financial markets, according to Wolfe Research analysts.
In summary, both Goldman Sachs and Wolfe Research caution that while short-term trends may be positive, the long-term burden of federal debt could pose substantial challenges and downside risks for the markets.
