Goldman labels market correction risks as inflation, Trump policies spark uncertainty – Invesco DB U.S. Dollar Index Bullish Fund ETF (ARCA:UUP), SPDR Dow Jones Industrial Average ETF (ARCA:DIA)

The risk of a stock market correction has risen sharply in early 2025, with Goldman Sachs estimating that the likelihood of a market correction is close to 30%, driven by a surge in policy uncertainty and changing inflation dynamics.

In a report released Wednesday, analysts Andrea Ferrario and Christian Müller Glissmann Highlights heightened risks from rising inflationary pressures, trade tensions and political uncertainty Donald TrumpThe second presidential term is scheduled to begin on January 20, 2025.

Analysts say these factors could lead to increased market volatility and weaker forward stock market returns.

Goldman Sachs’ framework shows the probability of a stock pullback has jumped to nearly 30%, a significant increase from 2024 levels. In some cases serious adjustments will occur.

Goldman Sachs said if the probability exceeds 35%, extreme outcomes are more likely.

One of the main drivers of this heightened risk is a resurgence in inflation, which has turned from negative to positive. The trend is particularly worrisome to investors as inflation could erode profit margins and limit central bank intervention during times of market turmoil.

Policy uncertainty has also risen sharply. “Global trade and U.S. tariff risks have been at the center of a surge in uncertainty, with measures of trade policy uncertainty surging above 2018-2019 highs,” the analysts wrote.

While the macroeconomic environment remains generally supportive of stocks, Goldman Sachs warned that market sentiment could deteriorate quickly in an adverse scenario.

The combination of geopolitical risks, inflation surprises and lower-than-expected corporate earnings could create a perfect storm for investors, leading to a more dramatic correction.

Goldman Sachs recommends hedging strategies to protect portfolios in this uncertain environment.

“We like short-term S&P 500 put spreads to hedge against near-term correction risks due to negative growth surprises, policy uncertainty around the U.S. Presidential Inauguration, or a missed January earnings season,” the note said.

For investors worried about a deeper recession, longer-dated S&P 500 puts may offer better protection. “Longer-dated S&P 500 puts could also benefit from lower front-end rates in the event of a severe growth shock following the recent hawkish repricing,” the analysts added.

The report also highlights hybrid instruments, which combine equity and currency exposure, as a hedge against rising interest rates and trade-related risks.

Goldman Sachs specifically recommends “S&P 500 Down/EURUSD Down Hybrid Index” and “S&P 500 Down/U.S. 10-Year Up Double-Digits” as effective hedges.

The former derivative is ideally suited to situations where equity markets and the euro fall simultaneously (perhaps in response to tariff policy), while the latter performs in an environment where equity markets are under pressure and bond yields rise on inflation concerns or expectations. Good higher rates.

Since Trump won the election in November, the U.S. dollar index – based on Invesco DB U.S. Dollar Index Bullish Fund ETF Youpu ——An increase of more than 5%. During the same period, blue chip stocks tracked SPDR Dow Jones Industrial Average ETF DIA The performance was mediocre.

The 30-year Treasury yield is hovering around 4.95%, having climbed more than 100 basis points since mid-September 2024.

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