The biggest risk to the U.S. economy right now could actually be a stock market correction, according to Goldman Sachs. The firm’s U.S. economist Pierfrancesco Mei is largely sanguine on the U.S. economy in 2026, forecasting it will expand by 2.5% on a year-over-year basis in the fourth quarter. That’s largely thanks to a favorable mix of fiscal stimulus, looser monetary policy and easing tariff headwinds. But he also worries that a sharp drop in equity prices could restrain that expansion. As an example, he wrote that a 10% pullback in the first half of the year could result in a 0.5 percentage point reduction to his GDP forecast, knocking it down to 2.0%. A steeper stock market pullback does even more damage. Another exhibit in Mei’s 16-page note out Monday showed a 20% stock drawdown could result in GDP falling short of his baseline estimate by nearly a full percentage point. ‘Near-term risk’ “Our analysis suggests that a sharp equity correction represents the most significant near-term risk,” Mei wrote. The primary risk lies in the damage a correction would inflict on the so-called ” wealth effect ,” the idea that households that hold a lot of stocks and real estate feel financially secure and willing to spend when the value of those assets rise — even when their incomes lag. In recent years, that has primarily helped higher income households, which are more likely to be invested in stocks that have been on a record-breaking tear since ChatGPT debuted in late 2022. An investor in the S & P 500 over the last three calendar years would be up a cumulative 64%. An investor in Nvidia would have seen their holdings surge by more than 450% over the same period. To be sure, Mei wrote that no single factor would tip the economy into a recession unless it were very large or resulting from multiple risks, such as a stock market selloff in addition to AI-driven job displacement and limited productivity gains. Under that scenario, the Federal Reserve is likely to cut interest rates, he said. K-shape But much of the U.S. economy is already facing recessionary pressures in a phenomenon known as the “K-shaped” economy — where the highest-earning consumers continue to spend while the lowest-income cohort struggle to afford necessities. “A stock market correction would turn the boost from wealth effects we expect into a drag on consumption in the second half of 2026,” Mei wrote. The highest-earning consumers are currently holding the U.S. economy aloft. While consumer spending accounts for two-thirds of the U.S. economy, the top 10% of consumers drive nearly half of total spending, according to Moody’s Analytics. More worrying, perhaps, is that stock market pullbacks can prove especially severe during volatile midterm election years. According to Aptus Capital Advisors, they’ve historically averaged intra-year declines of 19% at one point or another. A decline of 10% or more is typically defined as a correction on Wall Street, while slumps of 20% or more get called bear markets.
Biggest risk to the economy now? Goldman says it’s a stock market correction
Feb 25, 2026
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