Key Takeaways:
- BCA strategist Roukaya Ibrahim predicts a US recession before early 2025.
- She warns against prevailing optimism on Wall Street despite the looming recession.
- Ibrahim forecasts a potential 26% plunge in stocks during the economic downturn.
- Investors should take heed of Ibrahim’s forecast and consider reassessing their portfolios and risk exposure in anticipation of the forthcoming downturn.
In an interview with Fox Business Network, Ibrahim indicated that the economy could enter a downturn before early 2025.
She predicted that once a recession occurs, the S&P 500 could decline to as low as 3,500, representing a potential 26% drop from current levels. Ibrahim attributed this outlook to the Federal Reserve’s “aggressive” monetary tightening implemented since March 2022. With interest rates currently at their highest since 2001, economists have long warned that such levels could excessively tighten financial conditions and lead to a recession. Moreover, economists have highlighted that the full impact of Fed rate hikes is still unfolding, although initial signs of damage are emerging.
Ibrahim pointed out that auto loan delinquencies are on the rise, indicating that consumers are struggling to keep up with debt payments amidst inflationary pressures and increasing borrowing costs.
The economy’s savings rate remains near a historic low, with Americans saving just 3.7% of their income in December, roughly half of the rate seen in 2019. As tighter financial conditions persist, consumers are expected to save more and spend less, feeling the strain. A study by the San Francisco Fed suggests that Americans likely depleted their excess savings from the pandemic by the third quarter of 2023. Additionally, JPMorgan estimated that 99% of Americans would be financially worse off this year compared to pre-pandemic levels.
Roukaya Ibrahim cautioned that this could trigger a vicious cycle in the economy. Once a recession takes hold, stocks will be particularly vulnerable, especially given the prevailing bullish sentiment among investors. The latest Investor Sentiment Survey from the American Association of Individual Investors found that 44% of investors felt bullish about stocks over the next six months. This optimism contrasts sharply with Ibrahim’s warnings about the impending economic downturn and the potential consequences for stock markets.
Ibrahim anticipates a 10% decline in corporate earnings once a recession hits, which underpins her 3,500 price target for the benchmark index. This projection reflects her assessment of the economic landscape and its potential impact on corporate profitability.
In addition to Ibrahim’s warnings, other market commentators have also raised concerns about an impending recession and its implications for stocks. According to the “full model,” there is an 85% likelihood of the US entering a downturn, marking the highest probability since the 2008 Great Financial Crisis. Furthermore, economists at the New York Fed are pricing in a 61% chance of a recession occurring before January 2025. These assessments underscore the growing apprehension within the financial community regarding the economic outlook and its potential ramifications for the stock market.