Goldman Sachs' CEO says there's a 'reasonable' chance the US is heading into recession - and urges caution for big businesses

• There's a "reasonable" chance the US economy will enter a recession, the CEO of Goldman Sachs said.
• Economic activity may shrink as the Federal Reserve raises interest rates this year.

Businesses and investors should be prepared to see a contraction in activity in the world's largest economy as the Federal Reserve works to tighten conditions in a highly inflationary environment, Goldman Sachs CEO David Solomon told CNBC on Wednesday.

Solomon's comments came alongside a swing lower in US stocks after retail heavyweight Target's earnings were hit by a surge in costs, sending its share price tumbling roughly 25%.

The house view from researchers at Goldman Sachs is a 30% chance of recession and higher interest rates over the next 12-24 months, said Solomon.

"What I would say when I'm advising clients is we're going to tighten economic conditions," he said, referring to the Federal Reserve's raising of interest rates to tame hot inflation that reached 8.3% in April.

["You] have to think about the fact that we probably at some point – that there's a reasonable chance at some point – that we have a recession or we have … very, very slow sluggish growth," said Solomon who has been Goldman Sachs' CEO since 2018.

"That doesn't mean that that's definitely going to happen. But certainly, I think that if you're running a significant enterprise, you have to be looking through a lens with a little bit more caution right now than you might have been when we were sitting here a year ago."

Solomon said businesses should be gauging their risk appetite and planning how to maneuver through a slowdown.

Investors have sent US stocks sliding this year on concerns that the Fed's fast and large pace of rate hikes will pull the economy into a recession. The central bank has already raised interest rates by 75 basis points since March to a top benchmark rate of 1%, and the Fed is eyeing the potential to raise rates to more than 2% this year.

The S&P 500 has lost about 16% in 2022. Gross domestic product in the first quarter of 2022 shrank by 1.4% before the Fed kicked off its latest cycle of rate hikes.

Confidence among consumers and CEOs alike has waned somewhat and the velocity of M&A activity is not the same as it was 12-18 months ago, the Goldman boss said. But "the dialogue level inside our organization with companies large and small is very, very robust," he said.

As "the economic landscape is changing significantly, people are thinking a lot about how to best position themselves competitively," and companies that thought that they were going to have easy access to capital are looking at executing on their plans," he said.