Goldman Sachs' president believes the US economy will rebound stronger than expected in 2021 — but he's worried that 5 risks could still derail the market

  • Goldman Sachs President John Waldron believes that markets will recover faster than analysts expect.
  • But there are 5 risks he’s still worried about, including inflation and geopolitical conflict.
  • He discussed his bullish predictions and his lingering concerns at a recent live virtual event.
  • See more stories on Insider’s business page.

John Waldron has high expectations for 2021. 

It’s easy to see why he’s so optimistic. The president and chief operating officer of Goldman Sachs has helped lead his company through the depths of the pandemic and emerge with exceptional first-quarter earnings. Now, with Goldman shares up over 30% year-to-date amid a “very robust market environment,” Waldron believes that global markets are poised for strong growth. 

In a live conversation hosted by the Economic Club of New York on Monday, Waldron spoke about his outlook as markets around the world recover from the pandemic. 

“It’s a very dynamic environment,” he said. “We predicted a V-shaped recovery, but it’s not the same everywhere. I think we’re going to live through a Darwinian differentiation.”

While that may sound foreboding, Waldron is actually quite bullish overall — particularly when it comes to the US. Analyst consensus is that US GDP will grow 6.7% in 2021, but Goldman Sachs believes it will be closer to 7.25%. Waldron and his team base this prediction on several factors, particularly economic stimulus continuing to prop up the market.

“The enormity of the stimulus is substantial, and has a huge impact on the economic recovery,” says Waldron, referring to both fiscal and monetary stimuli alike. The combination of massive stimulus efforts, increasing vaccination rates, and pent-up consumer demand have made Waldron “very constructive” on the US in 2021. 

Waldron’s international outlook

Turning his attention beyond the US, Waldron is “more cautious but still bullish” on Europe. While he thinks European prospects are “still robust,” growth is going to be “back-half of the year driven” due to vaccination rates.  

The rate of vaccinations across the continent is improving, according to Waldron, and he believes that 50% of the continent will be vaccinated by June. That’s why “Europe is going to be a second-half story” this year, says Waldron, who notes that while economists’ consensus calls for 4% GDP growth in Europe this year, Goldman Sachs believes it will be closer to 5%. 

Finally, Waldron believes that the Chinese economy has reached pre-Covid levels and will continue to grow substantially this year. “China is operating more normally,” says Waldron, who reiterated Goldman Sachs’ analyst expectations of the GDP growing 8.5% in 2021. “We think China emerges from the pandemic very strong.” 

The one caveat is the Chinese credit market, which Waldron is keeping an eye on. “We think credit growth is pretty strong, and we wouldn’t be surprised if policymakers tap the brakes a little bit.” 

Overall, Waldron has a “very constructive bias” for the markets this year. “The US and China will emerge much stronger than the rest of the world,” says Waldron, while the “differentiation between emerging markets will be profound.”

5 risks to a bullish outlook

But Waldron tapered all of this optimism with some words of caution. While he has seen “enormous amounts of positivity across markets,” Waldron says that “our concern is if there’s too much speculation, risk taking, on the back of liquidity in the system.”

Those aren’t Waldron’s only worries. During the discussion he noted five major concerns he has about the market this year that have the potential to ruin his bullish outlook. 

1. Inflation

Inflation has been on everyone’s minds for months now. “We are concerned about inflation,” says Waldron, though he goes on to say that, “from a macro standpoint, we feel that central banks will be able to react accordingly and not let it get out of control.”

“We will see inflation readings in the short term given economic growth and stimulus compared to prior quarters,” says Waldron. But while those factors may lend themselves to rising inflation, Waldron believes that the real problem is wages. 

With labor markets tightening, Waldron has begun to worry about prospective wage pressure. During the discussion Waldron noted that he has heard a lot of stories about wage pressure in order to pay for talent, even going so far as to call it a “war for talent.” 

In short, says Waldron: “wage pressure is a real potential risk.” 

2. Retail Investors

Waldron is concerned that retail investors have had such a dramatic effect on the markets this year. He points to the “GameStop phenomenon” as a signal of more retail investor action to come, noting that “the amount of retail participation in the markets is at record levels.”

“We see tremendous activity from retail investors,” says Waldron. “We’re watching that carefully.”

3. Leverage

One of Waldron’s overarching concerns is the risk-taking activities of investors in a market filled with liquidity, such as over-leveraged investing. Specifically, Waldron says that he’s seeing “more market-based leverage than credit-led issues” as investors try to capitalize on a hot market.

Waldron cites the recent meltdown of Archegos Capital Management as an example of the problems that can arise from the concentration of leverage. In that case, the high levels of leverage that banks like Credit Suisse and Nomura provided Archegos ultimately backfired spectacularly. 

4. Margin Debt

In a similar vein, Waldron warns that margin debt “should be watched.” He says that “people are borrowing to get into equity markets” as the rally continues, and that the growth of margin debt in the market has been startling. 

“We see absolute levels of margin debt at the end of February at $800 billion,” which would mean “growth of $350 billion in a year,” says Waldron. “That’s a tremendous amount of margin debt.” 

5. Geopolitical Concerns

“China is on everybody’s minds,” says Waldron, succinctly summarizing perhaps the biggest geopolitical issue the markets face today. Waldron says that the relationship between the US and China is “obviously the most important and complex relationship in the world,” which is why “it’s important that this relationship works on some basis. The question is, what basis?”

According to Waldron, the Trump administration reset the relationship between the US and China — now the two countries have to find a way to move forward as the Biden administration takes the reins. So far, Waldron says that the Biden administration is “demonstrating a toughness with respect to underlying policy,” while taking a multilateral approach instead of Trump’s unilateral methods.

In spite of the differences between the two countries, Waldron says there are some areas where collaboration may win out. Vaccinating emerging markets is one way the US and China could cooperate that is in everyone’s best interests, while longer-term projects like sustainability and climate change present future opportunities for working together. 

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