A prolonged period of high interest rates could pressure U.S. stocks and revive concerns about the sustainability of government finances, according to Goldman Sachs.
Economist Pierfrancesco Mei said the recent rise in long-term Treasury yields has noticeably tightened financial conditions. While the impact on economic growth remains manageable for now, persistent high rates could create additional risks.
Goldman Sachs Expects Rates to Ease in 2027
Goldman Sachs currently expects the Federal Reserve to deliver one more interest rate hike in December.
The bank then forecasts three rate cuts beginning in the second half of 2027.
Under its base-case scenario, the 10-year U.S. Treasury yield is expected to decline from around 5.3% to 4.4% by the end of 2027.
Goldman estimates that higher interest rates would reduce U.S. GDP growth by around 0.2 percentage points in 2027 under this scenario.
That would still leave the economy growing close to its estimated 2.3% potential rate.
However, if interest rates remain near current levels for longer, the negative impact could rise to slightly more than 0.5 percentage points.
Housing Could Face the Biggest Pressure
The U.S. housing market is among the sectors most exposed to higher borrowing costs.
Mortgage rates have increased by more than one percentage point since February. At the same time, more than 90% of existing mortgage borrowers hold loans with rates below current market levels.
This creates a strong incentive for homeowners to stay in their existing properties rather than move and take on a more expensive mortgage.
Goldman expects higher rates to reduce annualized residential investment growth by around 2 percentage points in the fourth quarter.
The drag could average about 1 percentage point throughout 2027.
If rates remain elevated, the negative impact on housing investment could be roughly twice as large.
Consumer Spending Could Also Slow
Higher borrowing costs are also expected to weigh on consumer spending.
Goldman forecasts that consumer spending growth could decline by around 0.2 percentage points in 2027.
Higher rates make it more expensive for households to finance major purchases such as vehicles and other durable goods.
However, some of that weakness could be offset by higher interest income earned by savers.
Businesses Face Higher Financing Costs
Business investment may also come under pressure as companies refinance existing debt at higher interest rates.
Goldman estimates that this could reduce business investment growth by around 0.3 percentage points.
Small businesses could be particularly vulnerable because approximately half of their debt carries variable interest rates.
That means borrowing costs can rise more quickly when market rates increase.
Rising Yields Could Pressure U.S. Stocks
The first major risk identified by Goldman Sachs is the stock market.
The bank’s strategists currently expect equities to gain slightly more than 10% by the end of 2027.
However, persistently high bond yields could limit that upside.
If U.S. stocks remain broadly flat through 2027 because of higher rates, weaker household wealth effects could reduce consumer spending growth by just under 0.5 percentage points.
Until recently, some of the pressure from higher interest rates had been offset by rising stock prices, tighter credit spreads and a weaker U.S. dollar.
That support is now becoming less effective as overall financial conditions tighten.
U.S. Fiscal Sustainability Is the Second Major Risk
The second major concern is the U.S. fiscal outlook.
Goldman Sachs warned that persistently high interest rates could increase government borrowing costs and intensify concerns about fiscal sustainability.
The large U.S. primary budget deficit remains the main factor pushing government debt higher.
However, elevated interest rates would add another layer of pressure by increasing the cost of servicing that debt.
If borrowing costs remain high, the U.S. debt-to-GDP ratio could rise more quickly.
That could increase the likelihood that policymakers are forced to consider deficit reduction measures earlier than expected.
Overall, Goldman Sachs believes the economic impact of higher rates remains manageable under its base-case outlook. However, a prolonged period of elevated Treasury yields could create greater risks for stocks, housing, consumer spending and U.S. government finances.
