The bank crisis has raised the odds of a recession in the next year to 35%, according to Goldman Sachs

Silicon Valley Bank was shut down by regulators on Friday.

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• Goldman Sachs raised its recession odds from 25% to 35% on Thursday. 
• The Wall Street firm's new outlook stems from "increased near-term uncertainty," the strategists said. 
• The bank turmoil with Silicon Valley Bank, Credit Suisse, and others has fueled unrest in the global economy. 

Goldman Sachs just raised its odds for a recession as turmoil in the banking system continues to unfold. 

Strategists led by Goldman's chief economist, Jan Hatzius, said there's now a 35% chance of a US recession, up from the bank's previous forecast of 25%. They cited "increased near-term uncertainty" surrounding the effects of small bank stress. 

Thursday's research note follows a separate forecast from Goldman that slashed 2023 GDP outlook by 0.3% to 1.2%.

Goldman Sachs Global Investment Research

Over the last week, Silvergate Bank, Silicon Valley Bank, and Signature Bank have all closed down, and other financial institutions including First Republic and Credit Suisse are facing turmoil.

Silicon Valley Bank and Signature Bank marked the second and third largest bank failures in history, respectively, behind only Washington Mutual during the 2008 crisis. 

The fallout in the banking system has raised the chances of a downturn, in Goldman's view, even as markets price in smaller rate hikes or a pause from the Federal Reserve at the March meeting. CME's FedWatch Tool on Thursday showed traders are giving about a 25% chance to no rate hike next week, and about a 75% chance of a quarter-point hike.

Before SVB's collapse on Friday, markets had been expecting a 50-basis-point move.

The bank crisis shouldn't have come as a surprise to markets, given the Fed's rapid withdrawal of liquidity and policy tightening of the last year, according to Seema Shah, chief global strategist at Principal Asset Management. 

"Until this week, markets had broadly ignored the threats that tightening policy was starting to uncover," Shah wrote in a note Thursday. "The latest turmoil, however, has quickly reminded investors that risk assets simply cannot escape the wrath of monetary tightening."

Meanwhile, famed "Big Short" investor Steve Eisman warned that a pause in the Fed's tightening campaign would ultimately negatively weigh on stocks.  

"If the Fed is scared, you should be scared," he said in a CNBC interview on Wednesday. 

DataTrek Research co-founder Nicholas Colas warned in a note Thursday that stocks would fare poorly should the Fed pump the brakes, and it would mean policymakers are pivoting for all the wrong reasons.

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