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According to Doug Peta of BCA Research, stocks will undergo a sharp correction in the first half of 2025.
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He points to the risks of slowing consumer momentum, a weakening labor market and high valuations.
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He recommends getting out of the stock and playing defensively, buying the dip after a decline of 30% or more.
According to BCA Research, stock prices are ripe for a pullback early next year.
Strategists at the firm said U.S. stocks will rise in January before falling more than 20% sometime in the first half of the year, meaning investors will need to get defensive and hedge against risks.
The analysts, led by US investment strategist Doug Peta, point to a slew of data points that point to a weakening economy as the tailwinds of pandemic-era policies fade.
First, they pointed to a slowdown in consumer momentum following a surge in “revenge spending” following the COVID-19 pandemic.
Data now shows the trend may be slowing, even though households are generally better off than before the pandemic. Compared to the end of 2019, U.S. consumers have seen a rise in home equity and household wealth amid the stock market’s stellar rally, the analysts said.
Consumer-facing companies have issued warning signs of slowing spending, with revenues at Home Depot and Lowe’s down even amid rising home values, which previously signaled a rise in home improvement spending. Earnings calls from other major retailers such as Walmart and Target, meanwhile, have signaled an increase in bargain hunting as consumers tighten their budgets.
“The revenge spending appears to have run its course, with an increasing number of retailers reporting that consumption momentum has weakened,” the analysts said in a Monday note.
Secondly, BCA analysts pointed to a weakening in the labor market, with October employment figures showing job vacancies rising from a four-year low since September and back above the key 4.5% threshold, while the number of layoffs increased and the number of new employees decreased. a four-year low was reached in June.
This “one step forward, two steps back” trend maintains the possibility of a soft landing, but remains a sign of weakening that could lead to a recession, the analysts said.
“We expect the continued softening will eventually lead to a wave of layoffs, creating a vicious cycle in which shrinking labor costs lead to slower spending, further contraction in labor costs and even slower growth in spending until companies cut back on their discretionary investments and a recession ensues,” the analysts said.
Finally, they highlight the increased risks resulting from historically high stock valuations. The S&P 500 trades 23 times above annual earnings, almost two standard deviations above average, while analysts expect earnings per share growth of 13% in 2025, almost double the post-war average of 6.6%.
Such extreme valuations make risky assets vulnerable to even minor disruptions, analysts say, and with financial markets discounting the possibility of a recession, it makes stocks a risky investment.
“While we think a recession in 2025 is more likely than not, risky investments could disappoint even if a recession doesn’t occur, and current prices do not bode well for future returns,” they say.
These three growth trends pose excessive risk to the stock market’s two-year bull rally, the analysts said. As a result, they recommend getting out of stocks before buying the dip in case of a sharp decline.
“Nevertheless, we expect an equity bear market to occur sometime in the first half of the first half and we will look for an appropriate entry point to position against equities if our stop is triggered. We will be keen to reduce the underweight shortly after the 20% bear market. The threshold has been reached and will likely consider overweighting equities around -30% to -35% if they fall that much,” they say.
Read the original article on Business Insider
