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Goldman Sachs CEO: All businesses ‘are being more cautious right now’

Goldman Sachs CEO David Solomon joins Yahoo Finance Live’s Brian Sozzi at the Goldman Sachs 10,000 Small Businesses Summit in Washington, D.C., to discuss the biggest challenges small businesses face amid inflation, labor shortages, and supply chain woes as well as the outlook for the economy.

Video Transcript

[THEME MUSIC]

BRIAN SOZZI: Welcome back to "Yahoo! Finance Live." I'm Brian Sozzi in DC, at the Goldman Sachs 10,000 Small Businesses Summit. And I have a very special guest here-- Goldman Sachs Chairman and CEO David Solomon. Good to see you.

DAVID SOLOMON: Good to see you.

BRIAN SOZZI: Didn't I just see you on an earnings call?

DAVID SOLOMON: You did see me on an earnings call yesterday.

BRIAN SOZZI: All right.

BRIAN SOZZI: Well, you didn't-- you didn't see me. You heard me.

BRIAN SOZZI: I heard you. Well, I'll take that, as well. So, really, the room is getting full out here in DC, a lot of small business owners. Lots of things top of mind with them. I talked to one individual that was concerned about how to fire an employee, another one who's worried about inflation. What do you think the biggest challenges of small businesses are right now?

DAVID SOLOMON: Well, small businesses have had big headwinds over the course of the last couple of years. The pandemic was very, very tough on small businesses. But I will say one of the reasons we've brought all these small businesses together is to give them an opportunity both to interact with each other, share experiences, learn, but also to talk to their legislators about the support they need so that they can move their businesses forward.

Small businesses are such an important part of the lifeblood of the American economy-- huge hirers, huge employers, there's no question. And we've been surveying them, that they're concerned about the chance of a recession. But they're also optimistic, and they're also looking for ways to continue to move forward. And I think there's some great messages while we're here in Washington about making sure we get appropriate access to credit and appropriate support to small businesses so they can continue to invest and continue to grow, such a vibrant part of the US economy.

BRIAN SOZZI: You're right. Small business is very much the engine of this economy. Are they hunkering down?

DAVID SOLOMON: Well, hunkering down-- I think it's a little bit too big a generalization to say that all small businesses are hunkering down. I'd say all businesses, large and small, are being more cautious right now. There's more uncertainty around the economic trajectory of the country inflation. Is a big, big headwind, and it's a very, very tough headwind on small businesses. And so I think people are operating more cautiously. But I think people are watching, trying to figure out the trajectory of travel. People are investing in their businesses trying to move forward, but I think with a little bit more caution.

BRIAN SOZZI: I listened to your earnings call times. That's just what I do. I had to do it. And I--

DAVID SOLOMON: We have to find something better for you to do.

BRIAN SOZZI: Well, yeah.

BRIAN SOZZI: Because three times, I mean, that's--

BRIAN SOZZI: Get in line, David Solomon, because a lot of people tell me that.

DAVID SOLOMON: Maybe a Netflix show or something--

BRIAN SOZZI: All right. Fair enough.

DAVID SOLOMON: --after the first or second time.

BRIAN SOZZI: Fair enough. OK. But I heard-- I heard more caution in your voice than I heard three months ago. What made you say that?

DAVID SOLOMON: Well, I think there is caution in my voice. I don't know. On a relative basis to three months ago, I'd say three months ago I was pretty cautious too. We've had a bunch that's happened over the last six to-- you know, six to nine months, as we exit the pandemic and we were starting to move forward. Obviously, the war in Ukraine was a big disruptor.

But I've really seen, watched, and experienced through the eyes of our clients the growing imprint of inflation on the economic activity around the world. And it's a big headwind. And so I think that had one creates caution. I think the path is uncertain. There are a lot of people speculating about a recession. There are a lot of people speculating about the trajectory of all this.

What I'd say is I'm uncertain as to the trajectory of it all. But I know that the scenarios where we have a bumpy road ahead are certainly possible. And I think it's a time to be a little bit more cautious, and really kind of tighten up and make sure that you're deploying your assets and your resources in places where they're very, very prudent decisions.

BRIAN SOZZI: When does this-- these double digit gains-- we're seeing inflation for many different items. When does that slow?

DAVID SOLOMON: Well, it takes a while. Inflation is a hard thing to crack. I think the Fed's on it. They're starting to tighten monetary conditions. I think slowly we're starting to get some improvement in supply chains. But I think that's going to take some time. And so we've had a variety of real exogenous events from the pandemic and otherwise, the war, that have really kind of accelerated the inflationary environment. And it's going to take us a while to get some real relief. But I'm hopeful that as we head through the rest of the year and into next year we'll see a flattening out and ultimately a decline in inflation so we can get back to a more normal operating environment.

BRIAN SOZZI: Has inflation become entrenched?

DAVID SOLOMON: Well, I think right now-- and I said this yesterday my earnings call-- that inflation is deeply entrenched. But that doesn't mean that we can't, through appropriate monetary actions, different policy actions, get back to a better place where things are more in balance. But at the moment, inflation is a big issue. And it's having a big economic impact on everyone, and in particular it affects small businesses. It affects individuals across our country. And so we've got to really make sure we make the right policy decisions here to try to alleviate this economic headwind.

BRIAN SOZZI: Is the right policy decision for the Fed-- is that 100 basis point move at their next meeting?

DAVID SOLOMON: I won't speculate or predict a specific move. But economic conditions need to get tighter to break the back of inflation. And I think the Fed's focused on it, and they're moving in a direction. And hopefully we'll start to see, you know, some balance in all of this as they move in that direction.

BRIAN SOZZI: As we move to that tightening economic climate or backdrop from the Fed, do you see more market volatility?

DAVID SOLOMON: I do see a little bit more market volatility. But I think the volatility-- I think at this point the market is expecting, you know, more aggressive tightening on the part of the Fed. I think where we have some volatility or softness in the market as we look forward is I think you've got to watch corporate earnings. And up to this point, corporate earnings have hung in reasonably well.

But with a tightening economic environment, I think you're going to see more pressure on corporate earnings, and it's just math. If we kept the same earnings multiple on the S&P but corporate earnings decreased by 10%, you can figure out what the market impact is. So I think the big thing to watch in the next 12 months is corporate earnings. If you're a student of history, any time we've been in this kind of environment a decline in corporate earnings lags and comes next. And that should put-- that may put, not should-- that may put a little bit more pressure on stock markets.

BRIAN SOZZI: When I'm not listening to your earnings calls three times, I'm reading all the economic research from your team, specifically Jan Hatzius. I believe he's at a 40% chance of a recession next year. Are you on board with that.

DAVID SOLOMON: Jan is-- Jan is-- Jan, I think, is the best out there. He's, you know, an incredible economist. And his prediction, I believe, is a 30% chance of a recession this year--

BRIAN SOZZI: This year.

DAVID SOLOMON: --or in the next 12 months, and a 50% chance of a recession in the next 24 months. And so, you know, it's a data point. He's in the business of making predictions. I'm not in the business of making predictions. So we'll watch and see.

BRIAN SOZZI: How do you plan to run Goldman Sachs differently into this tightening economic climate?

DAVID SOLOMON: Well, we don't run Goldman Sachs differently. And I've been around in the business watching these economic scenarios for almost 40 years. I graduated from college in the early '80s, the last time we were coming out of a high inflation environment. We always run Goldman Sachs with a focus on our clients, trying to make sure we're getting our resources, our people, our capital, our financial resources directed at our clients.

In an environment like this, we probably have to be a little bit more cautious with respect to the way we invest in the future and growing the franchise. But we always take a long-term view. We try to be very, very nimble and flexible. I think this environment demands that. And we'll stay focused on our clients. And we know if we do that, and we do the right thing, we may see our business slow a little bit. But, in the long run, we'll continue to perform. And that's where our focus is right now.

BRIAN SOZZI: Do you see a spillover? So the economic climate overseas in Europe has really also taken a turn for the worst. Do you think that spills over to the US?

DAVID SOLOMON: Well, it's something I think you have to think about. I think the chance of a recession in Europe is certainly higher, given what's going on there economically and some of the policy decisions that have been made across the continent over the course of the last five to 10 years. A recession in Europe potentially knocks one percentage point off US growth.

And so we are globally connected. We do operate in a global ecosystem, economically. And a slowdown in Europe will have an impact on the United States. That's something that I think our economists like Jan factor in, you know, to their calculus when they're predicting the forward.

BRIAN SOZZI: Maybe you can clear this up for us. I've seen-- clear this up for us. I've seen some stories since the earnings report on hiring. Is there a hiring freeze at Goldman?

DAVID SOLOMON: There is not a hiring freeze at Goldman. And I--

BRIAN SOZZI: OK.

DAVID SOLOMON: You know, just to be candid, I was disappointed. I went back and-- you said you listened to the earnings--

BRIAN SOZZI: It's true.

DAVID SOLOMON: --the earnings call times.

BRIAN SOZZI: Mm-hmm.

DAVID SOLOMON: I went back and listened to it a first time. I participated the first time, but I listened to it. Dennis Coleman, our CEO, appropriately said we're looking at all our resources around the firm, you know, financial and otherwise, and we are slowing the pace of our hiring.

So we've grown the firm enormously over the course of the last few years. We've done a significant amount of hiring. We had planned to do meaningful hiring in the back half of the year and we're slowing it down. But we haven't frozen it. There's certainly places where we're investing and we'll continue to make those investments.

And he also mentioned that we have a performance evaluation process that we do every year at the end of the year. We skipped it in 2021, coming out of the pandemic. But we're always looking at, you know, the overall headcount of the firm. And we usually call a few percent to the firm every year. That's been something we do and we've done, you know, the 20-some odd years I've been at the firm. We've always done that, and so we're going back to that. But there is no hiring freeze. But we're going to be more prudent than slow down our growth in this environment.

BRIAN SOZZI: So you're bringing back that annual performance review. What do you think the results of that will be? Another, what, calling a percentage of the workforce?

DAVID SOLOMON: We've always-- it's one of the things that's important to understand about Goldman Sachs and the way, you know, we operate. It's a very performance-based culture. We're always looking to make sure that people that are performing in our organization don't hang around. Because it prevents us from giving the opportunity to hire more people that can really perform and add.

Remember, it's a professional services firm. It's a people organization. We just are starting this week 3,500 new analysts who are just out of undergraduate school, over 300,000 people--

BRIAN SOZZI: Wow. I feel old.

DAVID SOLOMON: Well, you know, I am old.

BRIAN SOZZI: [LAUGHS]

DAVID SOLOMON: You might feel old but I am old. Over 300,000 people applied for those jobs. And so we have this great talent ecosystem, and we always want to make sure we're making room for young, excited, energized talent, you know, to come into the firm. And so that's-- that's something we've always done. It's a return to normalcy for Goldman Sachs.

BRIAN SOZZI: As a former analyst myself, and in the spirit of analysts, let me ask you two questions in one. Checking accounts, back half of the year-- still rolling out?

DAVID SOLOMON: Yes. That is our plan.

BRIAN SOZZI: OK. Checking accounts-- and then, lastly, your 2024 targets that you put out Investor Day February, still on track?

DAVID SOLOMON: Yes. And you heard me-- since you listened to the earnings call three times-- I said, I think, twice in the earnings call-- once in my script and once in a question-- there's nothing about this environment that's changing our strategic plan for Goldman Sachs. We are continuing to invest in our core businesses, strengthen and grow these new platforms, which include transaction banking, asset management, wealth management, and our digital consumer bank.

Because we really think there's opportunity for us to diversify our revenue streams, have more fee income, more stable, predictable revenue base for the firm. And we think that will accrue in value to our shareholders. And so we're comfortable with those targets. They're three-year targets-- a lot of time between now and 2024. And, you know, we don't manage the firm on a quarter to quarter basis. But we feel very good about the strategy we've put in place, and we're going to continue to execute on it.

BRIAN SOZZI: Any Netflix suggestions for me?

DAVID SOLOMON: I-- I was told-- I don't know what's Netflix and what's not. But the two things that-- you know, I've got a long-- I've got a long trip. I'm going to Tokyo next week. And the two things that I was told to watch is what is called "The Offer, which I think is about the making of "The Godfather." And the other is called "Severance." And so those are the next two things on my streaming list when I get around to it. But--

BRIAN SOZZI: I will give you a four--

DAVID SOLOMON: --I'm a slow streamer.