Move over, JP Morgan – we have a new contender for the most apocalyptic stock market predictions.
It comes courtesy of Peter Berezin, chief strategist at BCA Research, who in a report shared with MarketWatch on Thursday said he has lowered his target for the S&P 500 SPX to 3,750 – lower than JP Morgan Global Research’s final target at the end of the year. 4,200, the previous low on Wall Street – reflecting expectations that the US will soon enter a sudden and unexpected recession. Berezin expects the recession to start later this year or early 2025.
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If that happens, the S&P 500 could fall more than 30% from Friday’s levels, he predicts.
Berezin expects the economic pain to be widespread, potentially making matters worse for markets. He expects growth in Europe, which is only just beginning to pick up, to slow. And China, still reeling from the aftermath of a housing bubble burst, could also buckle.
The result is that in this scenario, global growth as a whole will slow, putting pressure on global stock markets.
As for the US, Berezin’s thesis is rooted in the idea that a slowdown in the labor market is about to accelerate rapidly – ​​putting enormous pressure on consumer spending, a key economic engine.
He rattled off a number of indicators suggesting that the pandemic-era, breakneck pace of hiring has given way to something far less attractive to workers. As official job posting data shows, the number of open positions has fallen substantially, as has the layoff rate. And private surveys of job openings show an even more dramatic decline.
At the same time, data from the Ministry of Labor shows that wage growth has slowed.
There are also signs of slowing consumer spending in recently released economic data, including the personal consumption expenditure price index for May released on Friday.
But Berezin thinks this could be just the beginning, as a suddenly weakened labor market could set off a vicious cycle.
Bank balance data already shows that lower-income Americans appear to have depleted their pandemic-era savings. As delinquencies on credit cards and auto loans – already at levels not seen since 2010 – continue to rise, banks may choose to increase their lending standards, further increasing the pressure consumers face.
As consumers become more sluggish, Berezin expects companies to spend less on capital projects.
Data collected by BCA that tracks companies’ spending plans shows that many are already preparing to cut capital expenditures, or “capex,” despite the artificial intelligence boom, the CHIPS Act and ongoing reshoring trends that should give a boost according to Wall Street. this kind of expenditure.
Once the recession Berezin envisions arrives, the Federal Reserve is unlikely to step in to stop it — at least not right away. Fears of a second wave of inflation likely mean Fed Chairman Jerome Powell and his colleagues will be reluctant to act until it is already too late.
And fiscal policy probably won’t help much either. According to official estimates from the Congressional Budget Office, the budget deficit will already rise to 7% of GDP by 2024. Right now, the US desperately needs fiscal discipline, not an increase in budget deficits.
As a result, regardless of who wins in November, the bond market is likely to rebel against efforts to increase unfunded spending.
BCA advised clients earlier this week to reduce their equity holdings while increasing their allocation to bonds and cash.
But for those more inclined to tactical trades, Berezin recommended a few, including shorting the price of bitcoin BTCUSD and betting that falling bond yields will drag the US dollar DXY lower against the Japanese yen USDJPY. Berezin expects the yield on the 10-year Treasury note BX:TMUBMUSD10Y could fall to 3% if his recession scenario plays out, while the target fed funds rate could be cut to 2%.
For comparison, the 10-year yield was at 4.34% on Friday, while the target rate for the federal funds bond remains in a range of 5.25% and 5.5%.
JP Morgan’s top strategist Marko Kolanovic reaffirmed his target for the S&P 500, calling for the index to fall more than 23% from current levels by the end of the year.
According to JPM’s semi-annual outlook, published this week, the investment bank expects U.S. growth to moderate in the second half of 2024.
The investment bank’s negative view on equities is based on the idea that the mega-caps that have driven much of the market’s rise over the past year will have to increasingly demand higher levels of performance to impress investors with their earnings and forecasts.
According to Kolanovic, investor positioning and valuations for these names already appear stretched. This means that at some point the market-sustaining artificial intelligence trade must reverse — and when it does, the S&P 500 should see a big pullback.
U.S. stocks were in the red on Friday afternoon as the S&P 500 and Nasdaq Composite COMP struggled in their bid to close the first half of 2024 at record highs. The two indexes each lost more than 0.1%, while the Dow Jones Industrial Average DJIA fell 0.3%.
