The global stock market rally may be about to face the reality of recession

Professional traders work inside a site on the floor of the New York Stock Exchange (NYSE) in New York City, November 10, 2022.

Brendan McDiarmid | Reuters

Global stock markets have rebounded on hopes that central banks will soon start slowing their aggressive rate hikes as inflation shows signs of peaking, but strategists are not yet convinced that the rebound has legs.

Markets rebounded last week after that The US inflation rate came in below expectations for the month of October, prompting investors to bet that federal policymakers will soon have to slow or halt monetary policy tightening measures they have used to try to bring down inflation. The Standard & Poor’s 500 It posted its biggest one-day gain since the pandemic rebound hit in early 2020.

However, Fed Governor Chris Waller said on Monday that markets have overestimated the importance of one data point, and that the US central bank still has “a ways to go” in terms of raising interest rates.

Many analysts have echoed that sentiment in recent days. Black stone The Institute for Investment said in a note on Monday that the labor constraints driving wage growth and core inflation may be firmer than market rates are.

Although the rally in stocks suggests that markets are reaffirming hopes for a soft landing from the Fed, senior strategists at BlackRock disagreed and remained less heavy on developed market stocks.

“Stocks have jumped again and again this year in hopes that the Fed will come close to stopping the fastest hiking cycle since the 1980s, allowing the economy to enjoy a soft landing that avoids a recession,” said BlackRock Investment Institute President Jean Boivin and his team.

Carmenac UK: We see demand for alternative investments to mitigate risks

“We believe those hopes will fade again as the Fed presses ahead with excessive policy tightening. With the S&P 500 up 13% from its October low, stocks have moved away from recessionary pricing – and dividend cuts – looking ahead.” .

Central to the downside surprises BlackRock expects are dividend cuts. While consensus expects earnings growth to drop from 10% at the start of 2022 to just over 4% in 2023, the world’s largest investment manager expects zero growth, noting that third-quarter annual earnings growth will already be in negative territory below The massive gains. seen in the energy sector.

“We need to see stocks fall further, or more good news about easing inflation, for stocks to turn positive,” Boivin’s team said.

Those sentiments were echoed Wednesday by Dan Avigad, partner and portfolio manager at Lansdowne Partners, who told CNBC at the Sohn London Investment Conference that while central banks look to suppress demand in order to tame inflation, corporate margins will also have to put pressure on them. current very high levels.

“We’re still 20% above the long-term trend in terms of earnings, looking back on trends for decades, and so it seems very likely to me that the earnings paths of the broader stock market are overestimated by perhaps by as much as 15-20. %,” Avigad said.

Markets may have jumped on their heels, Morgan Stanley says, thinking that inflation is dead

pessimistic view

Wall Street rose last Thursday It was the 15th largest day-to-day gain for the S&P 500 since the mid-1960s, according to Capital Economics. Chief Market Economist Thomas Matthews said in a note on Monday that while there was a ostensible case for further gains if lower inflation leads to an end to monetary tightening, the economic research firm remains sticking to a dovish view of equities amid risks to the growth and earnings outlook.

Capital Economics expects a mild recession in the United States and contraction in several key developed markets, a macroeconomic outcome that Matthews suggested is not fully discounted in equity markets based on the consensus earnings forecast.

“Admittedly, US stock market valuations have now fallen a lot (as have stock market valuations elsewhere), but the experience of US recessions in the recent past is that the estimated price/earnings ratio of the S&P 500 has fallen a little bit closer,” Matthews said. from its inception, even if it was already low due to previous interest rate increases and despite declines in returns on real safe assets.”

“All this suggests to us that the sustainability of the recent rally depends at least on incoming data on economic growth and corporate earnings as it does on inflation.”

Pearlstone Alternative CEO: We're entering a new, extended pricing cycle

For now, though, Capital Economics sees earnings as disappointing in the market and weighing more heavily on stocks, and expects the S&P 500 to drop to 3,200 by mid-2023, about 20% below its current level, as stock markets decline. Other global stocks by similar amounts.

However, not everyone shares this opinion. Patrick Spencer, vice chairman of equities at Baird, told CNBC he hasn’t yet seen anything in the data that would suggest a recession in the US, and suggested that last week’s inflation data suggested the economy was eyeing a “soft landing.” . “

“The shares are trading based on an earnings review, and most of the dialogue is we’re looking at a severe recession in the US, which isn’t there right now,” Spencer said.

“Reviews and earnings still look OK, both in Europe, even in the UK looking at the valuation, and the US, so we’ll stay behind that argument.”

Leave a Comment