Move over, JP Morgan — we’ve got a new contender for most apocalyptic stock market prediction.
It comes courtesy of Peter Berezin, chief global strategist at BCA Research, who said in a report shared with MarketWatch on Thursday that he has revised down his target for the S&P 500 SPX to 3,750 — lower than JP Morgan Global’s target Research for the end of the year. 4200, Wall Street’s previous low – due to expectations that the US will soon enter a sudden and unexpected recession. Berezin expects the recession to begin either at the end of this year or at the beginning of 2025.
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If that happens, the S&P 500 could drop more than 30% from Friday’s levels as a result, according to his forecast.
Making matters worse for markets, Berezin expects the economic pain to be widespread. He expects growth in Europe – which is just starting to pick up – to slow. And China, still reeling from the collapse of a real-estate bubble, may also surrender.
The result is that, in this scenario, global growth would weaken overall, weighing on global stocks.
As for the US, Berezin’s thesis is rooted in the notion that a slowdown in the labor market is poised to accelerate rapidly — piling heavy pressure on consumer spending, a key economic driver.
He rattled off a number of indicators that suggest the torrid hiring pace of the pandemic era has given way to something far less attractive to workers. As official job opening data show, the number of job openings has fallen sharply, as has the rate of departure. And private surveys of job openings reflect an even more dramatic decline.
At the same time, Labor Department data show that the pace of wage growth has slowed.
There were also signs that consumer spending has slowed in recently released economic data, including Friday’s personal consumption expenditure price index for May.
But Berezin believes this could be just the beginning, as a weak labor market can start a vicious cycle.
Data on bank balances already show that lower-income Americans appear to have depleted their pandemic-era savings. As delinquency rates for credit cards and car loans – already at levels not seen since 2010 – continue to rise, banks may choose to raise their lending standards, adding to the pressures facing the consumer.
As consumer spending slows, Berezin expects businesses may slow their spending on capital projects.
Indeed, data collected by the BCA, which tracks business spending plans, shows that many are already preparing to cut capital spending, or “capex,” despite the artificial intelligence boom, the CHIPS Act and the ongoing resurgence trends that Wall Street believes they should encourage. this type of expenditure.
Once the recession predicted by Berezin arrives, the Federal Reserve likely won’t step in to stop it — at least not right away. Fears of reigniting a second wave of inflation are likely to mean Fed Chairman Jerome Powell and his colleagues will be reluctant to act until it is already too late.
And fiscal policy is unlikely to help much. The budget deficit is already projected to rise to 7% of GDP in 2024, according to official estimates from the Congressional Budget Office. Right now, the US is in dire need of fiscal discipline, not increased deficit spending.
As a result, regardless of who wins in November, the bond market is likely to rebel against any attempt to increase unfunded spending.
The BCA recommended that clients reduce their equity holdings while increasing their allocations to bonds and cash earlier this week.
But for those more inclined towards tactical trades, Berezin recommended a few, including shorting 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 pans out, while the Fed funds target rate could drop to 2%.
By comparison, the 10-year was at 4.34% as of Friday, while the target Fed funds rate remains in the 5.25% and 5.5% range.
For his part, JP Morgan chief strategist Marko Kolanovic reaffirmed his target for the S&P 500, which calls for the index to fall more than 23% from current levels by the end of the year.
According to JPM’s mid-term outlook, published this week, the investment bank expects US growth to moderate during the second half of 2024.
The investment bank’s elusive case for stocks is based on the notion that the megacap names that have fueled most of the market’s growth over the past year will face an increasingly high hurdle to impress investors with earnings and their predictions.
Investor positioning and valuations for these names already appear stretched, according to Kolanovic. That means that at some point, the AI trading that has been holding the market has to change — and when that happens, the S&P 500 should see a big pullback.
US stocks were falling into the red on Friday afternoon as the S&P 500 and Nasdaq Composite COMP struggled in their bid to end the first half of 2024 at record highs. Both indexes each lost more than 0.1%, while the Dow Jones Industrial Average DJIA fell 0.3%.