Home Finance News A Gentle Descent Might Not Rescue Stocks (13 words)

A Gentle Descent Might Not Rescue Stocks (13 words)

A Gentle Descent Might Not Rescue Stocks (13 words)

According to UBS chief strategist Bhanu Baweja, the U.S. economy can avoid a hard landing while stock prices continue to fall. Baweja argues that U.S. stocks are currently priced above-trend growth, implying 3.7% growth, which is higher than the 3.5% long-term trend. However, if the economy slows, even without a recession, stocks would have to adjust to below-trend growth. This would involve downward revisions of earnings and lower markets, without reaching a hard landing. Baweja also points out that a soft landing for the economy does not guarantee a soft landing for earnings, as consensus estimates project high earnings growth, which may be difficult to achieve considering projected nominal GDP growth and potential margin contraction.

While indicators are pointing towards a soft landing, the S&P 500 is already trading at historically realistic levels. Baweja explains that for recoveries to turn into expansions, they need to be supported by monetary or fiscal policy. However, the Federal Reserve’s strategy for a soft landing, based on higher real interest rates, does not support this case. Therefore, Baweja expects leading indicators to pause, putting downward pressure on the market as growth expectations stall. Essentially, Baweja suggests that lower earnings may occur within the context of weaker, non-recessionary growth.

Stifel Market Strategist Barry Bannister shares a similar view, predicting that although there may be a hotter economy over the next several months, it will not fuel new highs for equities. Bannister believes that inflation will stabilize above the Fed’s 2% target, leading to the continuation of tight financial conditions and constraining equity valuation. He expects the S&P 500 to finish around 4,400 at the end of 2023, which is below its previous high in July. While this level implies relief from recent losses, Bannister’s outlook suggests that the market may not experience significant gains.

In conclusion, both Baweja and Bannister argue that a hard landing is not necessary for earnings to decline. Stock prices are already adjusting to below-trend growth potential, and the future performance of the market will depend on various economic factors and the support provided by monetary and fiscal policies.

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