Goldman Sachs CEO Lloyd Blankfein gave his state of union on CNBC's "Street Signs" Tuesday, saying the political environment remains difficult as Washington grapples with the sequester but the "economic underpinnings are actually better than they have been for some time."
"We could be on the threshold of a bull market," Blankfein said.
The Goldman executive listed extremely low interest rates, a "terrific" energy situation which can drive manufacturing and create jobs, and an ongoing turnaround in housing as reasons to be bullish. But he cautioned that the U.S. needs good policies to make sure it can benefit from those advantages.
"A million things can go wrong but what people under-assess is things could go right," Blankfein said. With the U.S. stock market flirting with all-time highs, he added, "The equity market could very well have it right."
Blankfein's comments come just after his firm turned neutral on global equities in the near-term, saying the market will need to digest recent gains. But the firm maintains an "overweight" rating on global stocks over the next 12 months.
(Read More: Goldman Sachs Downgrades Global Stocks as Rally Stalls)
The comments on the outlook for the U.S. economy also come ahead of President Barack Obama's State of the Union address Tuesday evening.
The U.S. has also made significant progress on dealing with its debt and deficits, Blankfein said, but there is more work to be done. He noted that with sequestration, tax increases and other measures, politicians have cut nearly $2.6 trillion — still far below the roughly $4 trillionsome say is needed.
"When you look through it, come hell or high water, we're going to have $2.6 trillion" in cuts, he said. "It's not where we should be but it's not nothing."
While the U.S. economy has deleveraged and there are opportunities for growth, Blankfein said there are still risks in Europe. He said that there's still a lot of leverage and the euro has made it more difficult to ease monetary policy and come to a consensus on things to support the economy.
As for the investment-banking business, Blankfein expects a pickup in merger activity. "My expectation, generally, would be for where we are in the economic cycle, given the level of interest rates — which are very, very low — and equity market values which are high and moving higher — we think there should be more activity now generally than we're seeing," Blankfein said.
Once some of the uncertainty about taxes and austerity measures get cleared up, the merger market will recover, he said.
"Personally, I think the market is going to catch up with itself," Blankfein said. "There's a lot of uncertainty swirling around, where people don't know the value of things."
And with other investment banks shedding jobs to boost returns, Blankfein said Goldman Sachs is "happy where we are."
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