Peter Berezin’s recent forecast for the stock market presents a stark contrast to the prevailing optimism seen in earlier projections. As the chief global strategist at BCA Research, Berezin has adjusted his year-end target for the S&P 500 downwards to 3,750, indicating a potential decline of over 30% from current levels if his anticipated scenario unfolds. At the core of Berezin’s cautious outlook is his expectation of an impending recession in the United States, which he foresees beginning either later in 2024 or early 2025.
Berezin’s concerns extend beyond the borders of the U.S., encompassing broader global economic vulnerabilities. He anticipates that economic growth in Europe, which has only recently begun to recover, could slow down. Additionally, he points to ongoing challenges in China, particularly stemming from the aftermath of a real estate market bubble collapse, which continues to weigh on the economy. Should these global dynamics align as he predicts, the cumulative effect would likely dampen investor sentiment worldwide, impacting stock markets across regions.
The crux of Berezin’s recession thesis revolves around substantial weaknesses in the U.S. labor market, a critical pillar of economic stability. He highlights several indicators signaling a significant shift from the robust hiring trends observed during the pandemic era. Job openings have notably declined, accompanied by a reduction in the quit rate, indicating a less favorable environment for job seekers. Moreover, data from the Labor Department suggests a slowdown in wage growth, further complicating the outlook for consumer spending, a pivotal driver of economic activity.
Recent economic data supports Berezin’s concerns, showing early signs of deceleration in consumer spending. This trend is underscored by reports such as the personal consumption expenditures price index for May, which hinted at easing consumer demand. Adding to the economic pressures, Berezin notes that lower-income Americans appear to have depleted their pandemic-era savings, while delinquency rates on credit cards and auto loans have risen to levels not seen since 2010. These financial strains could prompt banks to tighten lending standards, potentially exacerbating the challenges faced by consumers.
Looking ahead, Berezin anticipates a ripple effect across corporate America, with businesses likely to scale back on capital expenditures amid softer consumer demand. Despite positive industry trends like the adoption of artificial intelligence (AI) and initiatives such as the CHIPS Act aimed at bolstering semiconductor production, the overall economic backdrop could prompt caution among companies. Data from BCA indicates that many businesses are already preparing to reduce capital investments, anticipating a more subdued economic environment.
In terms of policy responses, Berezin suggests that the Federal Reserve may adopt a cautious approach, refraining from aggressive monetary interventions initially to avoid sparking inflation fears prematurely. This stance reflects ongoing concerns about balancing economic stimulus with inflationary pressures, a delicate balancing act for Fed Chair Jerome Powell and his colleagues.
Moreover, fiscal policy options may be limited, with the U.S. budget deficit projected to expand to 7% of GDP in 2024 according to Congressional Budget Office estimates. This fiscal backdrop underscores the challenges of implementing substantial government spending measures amid calls for fiscal discipline.
Given these projections, BCA has advised its clients to reduce equity exposure while increasing allocations to safer assets such as bonds and cash. Berezin also recommended specific tactical trades, including short positions on bitcoin and bets on declining bond yields weakening the U.S. dollar against the Japanese yen. These strategies align with his expectation that the yield on 10-year Treasury notes could drop to 3% in a recessionary scenario, while the Fed’s target rate may be cut to 2%, down from its current range of 5.25% to 5.5%.
In contrast, J.P. Morgan’s outlook offers a less dire but still cautious perspective, with their strategist Marko Kolanovic projecting a 23% decline in the S&P 500 by year-end. Their analysis highlights stretched valuations and heightened investor expectations for large-cap stocks, factors that could contribute to a significant market correction.
Recent market movements reflect this uncertainty, with U.S. indices like the S&P 500 and Nasdaq Composite showing volatility as they struggle to maintain record highs amid shifting economic signals. This environment underscores the complexity and challenges facing investors as they navigate divergent forecasts and prepare for potential market adjustments in the months ahead.