Don’t shoot the messenger but several economists and macro and equity strategists believe the chances of a recession in the U.S. are increasing.
The good news?
Th economic contraction may not hit until 2023.
Barclays is cutting its forecast for the S&P 500, leaving precious little upside from here for the broad benchmark stock index.
And Wells Fargo sees a myriad of factors impacting economic and profit growth.
Here are the hi-lights of their respective reports.
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With excerpts from Business Insider
Barclays has cut its S&P 500 price target and earnings outlook as it foresees consumers pulling back their spending on goods as the COVID-19 pandemic eases and oil prices jump.
The investment bank downgraded its 2022 S&P 500 forecast to 4,500 from 4,800 and reduced its per-share earnings view for the benchmark to $223 from $235.
The S&P 500 stood at 4,485, as of this writing.
“We believe that SPX earnings will have a greater difficulty in 2022 than currently anticipated, with the potential for a strong reversion in goods consumption that is under-appreciated by current consensus expectations,” said Barclays in a research note led by Jonathan Millar, deputy chief US economist, and Maneesh Deshpande, head of US equity derivatives strategy.
Consensus expectations for sales and per-share earnings for S&P 500 companies have strongly moved up during 2022 despite margin contraction in the fourth quarter of 2021, a slowdown in companies beating earnings expectations, and flattening goods consumption.
“We believe this is overly optimistic as our new base case of ~2 years for goods consumption to revert to trend should blunt full-year 2022 EPS growth by ~11%,” Barclays said.
It had previously expected goods spending to revert over the next five years.
High goods consumption has been a key factor in driving up earnings growth over the last two years:
- COVID-19 lockdowns forced people to substitute certain services with goods – switching from eating at restaurants to buying food to cook at home, or gym closures leading to sales of home exercise equipment.
- Work-from-home setups called for purchases of home office supplies as well.
- Cumulative excess goods spending reached $2 trillion above trend levels since the start of the pandemic.
Spending on goods is likely to slow as the COVID pandemic wanes and as fiscal stimulus that aided households runs out.
Spiking oil prices put further pressure on goods spending as consumers adjust their budgets to accommodate higher gas and energy costs by curtailing spending in other areas.
At the same time, the odds of a recession are increasing, with the US economy likely to fall into a slump in 2023, according to Wells Fargo head of macro strategy, Michael Schumacher.
Schumacher pointed to a range of factors including:
- Historic inflation
- Spiking mortgage rates
- Commodity prices
- The pandemic
- The war in Ukraine that all make the Fed’s path forward difficult to navigate
All of these factors have led Schumacher to forecast a 50% chance of recession by late 2023.
“The idea of having a soft landing was always going to be really challenging, and when you think about the additional complications it makes it super tough for the Fed to calibrate,” Schumacher said.
The strategist also noted the probability of the Fed overshooting with its plans for raising interest rates is also getting higher each day, and that the market is not prepared to handle more aggressive rate hikes.
“There’s not really a great path for the Fed to try and limit recession risk, as far as going big, going early, going 50 basis points in May.
I don’t know if it really changes the ultimate question of how you calibrate all these issues that are coming together.”
Markets have fluctuated since the Fed first suggested it would hike interest rates, but mixed signals from Fed Chair Jerome Powell as well as the external factors like war in Ukraine are complicating factors for investors.
Even if the Fed moves forward with a 50 basis-point hike in May as it signalled that it might, it wouldn’t change the calculus for a coming recession, according to Schumacher.
“Does throwing in a 50 basis point hike or two really change the calculation? I think it doesn’t.”
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