It came close to ending Friday’s session in a bear market, which quickly intensified the debate over whether or not the market took place. bottomor if it is just preparing to hibernate as recession fears mount.
At its lowest level on Friday, the S&P 500 is down 20% from its peak. And while it closed slightly higher – while avoiding the technical definition of a bear market – the narrow error has fueled the flames in the rapid debate between bears and bulls over the fate of the stock market.
Bulls remain optimistic that deflation is short term contraction And that the stock market has already helped to slow down sharply. Optimists believe that inflation will begin to cool over the next few months, and that the Federal Reserve, in turn, will ease its tightening policy.
They also point to the continued strength of the labor market, as evidenced by a low unemployment rate and weeks of jobless claims hovering around their lowest levels in decades. And with a strong job market comes a healthy consumer. Indeed, Retail Sales in April The forecast met the consensus, rising 0.9% on a monthly basis.
But bearish analysts have heeded their call, urging investors to sit back in the next two months as recession fears become more acute.
“We believe the odds are stacked heavily against the Fed in its attempt to avoid a recession,” Wolfe Research analysts led by Chris Senek wrote in a note. “While the vast majority of street economists do not agree with us, markets are increasingly turning toward our view.”
Several economists have suggested that the United States has already reached peak inflation, with indications on the Consumer Price Index slowdown in April. However, inflation is still close to its highest levels in decades, and the team at Wolfe Research believes the numbers could be higher than expected in subsequent quarters.
Perhaps most worrisome, analysts wrote, is that inflation is becoming more entrenched throughout the economy. They added that this creates a series of negative feedback loops that will keep prices elevated beyond 2022 and cause the Fed to tighten more severely and for a longer period of time than Wall Street currently expects.
These trends do not bode well for the stock market, which has already taken a hit throughout the year.
“Our sense is that the next phase of a bear market will be driven by increased recession risks (our base case remains in 2023) and downward earnings revisions,” they wrote.
Recession will severely affect consumer health, causing negative real income growth and limiting discretionary purchases and consumer confidence. Analysts said that while consumers have better protection against a recession after two years of pandemic savings, that protection may not be enough to get out of a recession.
While the bulls believe the stock market has already priced in recession fears, Wolff’s team believes that stocks still look expensive by several measures — and the cost of those stocks will only increase when analysts begin adjusting their earnings forecasts. They expect operating earnings per share for the S&P 500 to fall at least 15% from peak to trough.
Some viewed the defect as a buying opportunity, especially in the notoriously expensive technology sector. Jefferies analysts, for example, Turned to the upside of technology stocks On Monday, saying that a tradable rally could soon unfold for the technology.
Wolff’s analysts responded, saying the sector’s earnings will prove cyclical again as the economy enters a recession. The key to buying cyclical stocks is to buy at the right time. As of now, “too early.”
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