This is Goldman Sachs' view on "the biggest risks to the U.S. economy and markets"

Goldman Sachs pointed out that the core risks currently facing the U.S. market and economy are no longer the financial excesses of the private sector, but rather the increasingly severe public sector debt issues and high asset valuations.

On July 29, Goldman Sachs Chief Economist Jan Hatzius released a report stating that although real estate valuations are high, the financial imbalance risks in the private sector (including households and businesses) remain relatively low. In contrast, the fiscal situation of the public sector poses a more significant medium- to long-term threat.

The report warns that if debt and its interest payments grow out of control, the U.S. will face severe challenges to fiscal sustainability. This potential risk could push up interest rates, tighten the overall financial environment, and hinder economic growth.

Fiscal Sustainability: The Biggest Challenge for the U.S. in the Medium to Long Term

The report clearly states that the biggest risk the U.S. faces in the medium to long term may be fiscal sustainability.

If the scale of national debt and corresponding interest payments grow to a sufficiently large extent, stabilizing the debt-to-GDP ratio will require the government to maintain large fiscal surpluses over the long term, which is politically difficult to sustain.

While it is hard to predict when the market will become more concerned about this issue, any resulting upward pressure on interest rates could tighten the broader financial environment and hinder economic growth.

Goldman Sachs particularly emphasizes that the destructive impact of such shocks may be greater given that asset valuations are already high.

Goldman Sachs points out that despite high interest rates and increasing geopolitical uncertainty, U.S. stock market valuations remain at their highest levels since the late 1990s.

The firm's portfolio strategist model shows that the model's predicted reasonable price-to-earnings (P/E) ratio is 20.7 times, while the current actual level is 22.4 times, significantly above the average of 15.9 times since 1990.

Additionally, Goldman Sachs' speculative trading index also indicates that current risks are elevated, with phenomena such as "Meme stock" trading being one of the signals of heightened market risk appetite.

No Concerns About High Real Estate Prices, Private Sector Debt Risks Are Controllable

Although Goldman Sachs' monitoring indicators show that housing prices pose some risks, its team of economists is not particularly worried.

They believe that the current high housing prices mainly reflect a persistent supply-demand imbalance in single-family homes, rather than loose lending standards or speculative purchases—both of which would trigger real financial stability issues.

The report anticipates that the shortage of single-family homes may continue for some time, limiting the risk of significant declines in housing prices.

At the same time, data shows that loose credit is not the main driver of this round of housing price increases, as the median credit score of borrowers at the time of mortgage issuance is still slightly above the levels seen in the years before the pandemic.

Regarding household debt, the report addresses two major concerns:

First, regarding the long-term worry about low savings rates, Goldman Sachs' model indicates that low savings rates ultimately reflect fundamental factors such as household wealth levels.

Second, concerning the rising default rates on consumer credit that reveal financial vulnerabilities, the report believes this mainly reflects past "unintentional risky lending," rather than a general deterioration in household financial conditions, and that current default rates have stabilized In terms of corporate debt, although corporate interest expenses have risen significantly in recent years, the consequences still seem limited to date.

Goldman Sachs estimates that refinancing maturing debt will only increase interest expenses by 3% over the next two years, a forecast that is significantly lower than the 7% it estimated in 2023, mainly because a large amount of debt has been refinanced in a higher interest rate environment, and corporate bond rates have recently declined significantly