Analysts Predict Potential Recession Despite Global Stock Market Rally

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Global stock markets have soared amid hopes that central banks will rein in interest rate hikes. However, analysts say the recent stock rally is not sustainable, arguing that the rebound has no strength.

During the last few days, inflation in the US for October was estimated below expectations. Consequently, the markets were boosted.

The S&P 500 experienced its biggest single-day jump after the 2020 rebound rally, raising hopes that the Federal Reserve’s aggressive monetary policy was about to be eased.

However, on Monday, Fed Governor Chris Waller said the market rally came from an “overestimation” of only one data point.

Several analysts and economic experts echoed Mr. Waller’s comments, saying they are still not convinced that the rebound in stock markets is going strong.

According to the BlackRock Investment Institute, core inflation and wage growth driven by labor constraints could be more persistent than the market shows.

BlackRock’s top strategists said that while the rise in stocks suggests markets are reaffirming hope that the Fed can lower interest rates, the reality is different.

On Monday, BlackRock director Jean Boivin said equities had risen repeatedly in 2022 amid hopes the Fed would halt interest rate hikes – the fastest since the 1980s.

However, Mr. Boivin and his team believe those hopes could quickly fade as the Fed presses ahead with a tougher monetary policy.

BlackRock’s team also expects surprises on the downside due to earnings cuts. Other experts anticipate earnings growth to fall to 4% in 2023 from 10% in 2022.

However, he expects zero growth. Without the huge energy sector windfalls, third-quarter annual earnings growth should already be in negative territory, BlackRock’s strategists said.

Mr. Boivin’s team insisted that only better news about easing inflation or seeing stocks fall further could make them “turn positive on stocks.”

Speaking at the London Investment Conference, Lansdowne Parter’s partner and portfolio manager Dan Avigad supported the view that the market rally was not strong. He said corporate profits were at very high levels and needed to be compressed as central banks sought to suppress demand to control inflation.

In addition, Mr. Avigad insisted that earnings were still 20% above the long-term trend compared to the market’s behavior in the past decades.

Therefore, the stock market is likely overestimating earnings by 15-20%, Mr. Avigad added.

A Capital Economics report showed that Wall Street’s rally last week accounted for the S&P 500’s 15th-biggest single-day gain since the mid-1960s.

However, Capital Economic’s senior markets economist Thomas Mathews said the firm still took a pessimistic view on shares. He argued the rally posed a risk to growth and earnings prospects despite many believing the end of the interest rate hikes due to a potential drop in inflation could bring further gains.

The economic research firm expects the United States to face a mild recession soon. In addition, it predicts that the main developed markets will experience contractions.

Mr. Mathews also said Capital Economics was not ruling out a macroeconomic outcome in the stock market entirely.

While the US stock market valuation has dropped a long way, experience over US recessions in the recent past indicates that the S&P 500’s price/estimated earnings ratio should fall a bit further around their onset even if it was already low, he added.

The economic expert said that all indicators point to the latest report’s sustainability depending on incoming data on economic growth, corporate earnings, and inflation.

Capital Economics says earnings will disappoint the market but weigh more heavily on stocks. The firm forecasts the S&P 500 to plunge 20% below its current level to a low of 3,200 in next year’s second quarter.

However, Baird’s vice president for equities does not share the pessimistic view, saying he has not seen any data suggesting the country could be hit by a recession.

Last week’s inflation data shows the economy is experiencing a soft landing, he added.

Many believe that a sharp recession is expected in the US as equities are trading on earnings revisions, but that’s not there at the moment, he insisted.

In addition, Mr. Spencer said earnings reviews and earnings still look “okay” in both Europe and the UK despite inflation. Based on those facts, Baird upholds the argument that a recession is not coming.