Stocks will fall 30% as the U.S. economy heads for a painful recession, strategist says

Move over, J.P. Morgan — we have a new contender for most apocalyptic stock-market forecast.

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 J.P. Morgan Global Research’s year-end target of 4,200, the previous Wall Street low — due to expectations that the U.S. will soon enter a sudden and unexpected recession. Berezin expects that recession to begin either later this year or in early 2025.

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Should that transpire, the S&P 500 could decline more than 30% from Friday’s levels as a result, according to his forecast.

Potentially making matters worse for markets, Berezin expects the economic pain will be widespread. He expects growth in Europe — which is only just starting to pick up — to slow. And China, which is still struggling in the aftermath of the collapse of a real-estate bubble, could also succumb.

The upshot is that, in this scenario, global growth would weaken at large, weighing on global stocks.

As far as the U.S. is concerned, Berezin’s thesis is rooted in the notion that a slowdown in the labor market is poised to accelerate rapidly — heaping enormous pressure on consumer spending, a key economic driver.

He rattled off a number of indicators suggesting that the torrid pace of pandemic-era hiring has given way to something far less appealing to workers. As official job-openings data show, the number of open positions have fallen substantially, as has the quit rate. 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 have also been signs that consumer spending has been slowing in recently released economic data, including Friday’s personal-consumption expenditures price index for May.

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But Berezin believes this could be only the beginning, as a suddenly enfeebled labor market may kick off 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 auto loans — already at levels unseen since 2010 — continue to climb, banks could opt to raise their lending standards, adding to pressures facing the consumer.

As the consumer slows, Berezin expects businesses could slow their spending on capital projects.

Indeed, data collected by BCA that tracks businesses’ spending plans show that many are already preparing to cut back on capital expenditures, or “capex,” despite the artificial-intelligence boom, the CHIPS Act and ongoing reshoring trends that Wall Street believes should boost this type of spending.

Once the recession envisioned by Berezin arrives, the Federal Reserve likely won’t swoop in to stop it — at least not right away. Fear of reigniting a second wave of inflation likely means Fed Chair Jerome Powell and his colleagues would be reluctant to act until it is already too late.

And fiscal policy likely won’t be much help, either. The budget deficit is already projected to grow to 7% of GDP in 2024, according to official Congressional Budget Office estimates. Right now, the U.S. is in dire need of fiscal discipline, not an increase in deficit spending.

As a result, regardless of who wins in November, the bond market would likely rebel against any attempts to increase unfunded spending.

BCA recommended that clients reduce their equity holdings while boosting their allocations to bonds and cash earlier this week.

But for those more inclined toward tactical trades, Berezin recommended a few, including shorting the price of bitcoin BTCUSD and betting that falling bond yields will drag the U.S. dollar DXY lower against the Japanese yen USDJPY. Berezin expects that 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 be cut to 2%.

By comparison, the 10-year was at 4.34% as of Friday, while the fed-funds target rate remains in a range of 5.25% and 5.5%.

For its part, J.P Morgan’s top strategist, Marko Kolanovic, reaffirmed his target for the S&P 500, which is calling for the index to drop more than 23% from current levels by year’s end.

According to JPM’s midyear outlook, released this week, the investment bank expects U.S. growth to moderate during the second half of 2024.

The investment bank’s bear case for stocks is based on the notion that the megacap names that have driven much of the market’s rally over the past year will face an increasingly high bar to impress investors with their earnings and forecasts.

Investor positioning and valuations for these names already look stretched, according to Kolanovic. This means that at some point, the artificial-intelligence trade that has been holding up the market should reverse — and when that happens, the S&P 500 should see a major pullback.

U.S. stocks were dipping in the red on Friday afternoon, as the S&P 500 and Nasdaq Composite COMP struggled in their attempt to finish off the first half of 2024 at record highs. The two indexes were each losing more than 0.1%, while the Dow Jones Industrial Average DJIA was down 0.3%.

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