Investors are evaluating whether the U.S. economy can avoid a significant downturn as the Federal Reserve raises rates to combat the worst inflation in decades, after a disastrous first half for the stock market.
The answer to that query is likely to directly affect markets. According to strategists, the S&P 500 could decline by at least another 10% as a result of a downturn in the economy and weak corporate earnings, adding to the losses that have already driven the benchmark index down 18% year-to-date.
According to some analysts’ price targets, on the other hand, stocks could rebound to close to where they started the year in a scenario that includes strong profit increases and moderating inflation.
Investors believe that we are currently experiencing a slowdown, according to Lindsey Bell, chief markets and money strategist at Ally. The main concern is how severe this slowdown will be.
On Friday, a Labor Department report revealed that employers hired far more workers than anticipated in June, undercutting the argument for an impending economic downturn and giving the Fed justification for another 75 basis-point interest rate hike this month.
According to the June employment report, the economy is neither in an overheated nor a recession, much less on the verge of either, according to Oxford Economics.
It foresaw increased market turbulence “amid increased speculation over what the Fed will do.”
Later this month, as second-quarter earnings reports pour in over the following few weeks and investors analyze new data, including Wednesday’s closely watched consumer prices report for June, more significant information on the direction of the economy is anticipated.
Despite the Fed’s assurance that it will achieve a “soft landing” by bringing inflation down without upsetting the economy, some investors think this year’s sharp stock declines indicate that a certain amount of economic slowdown is already factored into asset prices.
In line with the 24 percent median decline the index registered in prior recessions, the S&P 500, for instance, has dropped as low as 23.6 percent from its January record high this year, showing that “at least some of the challenging environment is reflected in stock prices,” according to Keith Lerner, co-chief investment officer at Truist Advisory Services.
When there has been a “significant decline in economic activity that is spread across the economy and lasts more than a few months,” the National Bureau of Economic Research declares a recession to have occurred.
Forecasts for how unstable the economy may become vary.
The S&P 500 could drop to 3,300, or about 31% below its January high, according to a note outlining various economic scenarios from UBS Global Wealth Management. This would happen if an economic downturn causes a sharp decline in corporate earnings, as well as in the case of “stagflation,” which is typically characterized by a cocktail of persistently high inflation and slow growth.
The bank’s analysts assigned a 30% probability to the “slump” scenario and a 20% probability to stagflation.
However, their most likely scenario involves a “soft landing,” in which the S&P 500 ends the year at 3,900, or roughly where it closed on Friday.
Investors’ belief that inflation is under control and earnings can remain robust despite tighter financial conditions is necessary for such a scenario, to which UBS assigned a 40% weighting, they said.
BofA Global Research strategists suggested investors pair up sectors of the stock market that would profit from inflation, like energy, with protective sectors, like healthcare, in a recent note outlining the “increasing likelihood of a stagflationary environment.”
Meanwhile, Wells Fargo Investment Institute strategists lowered their year-end S&P 500 target to a range of 3,800-4,000 earlier this week and predicted a “moderate U.S. recession.”
Some investors have a more upbeat outlook on the economy and think stocks may rise from their current levels.
While they also saw a 40% chance of a mild recession and a 5% chance of a severe one, Citi’s strategists gave a “soft landing” scenario a weight of 55%. Their S&P target for the year is 4,200.
Oppenheimer Asset Management’s John Stoltzfus, chief investment strategist, this week lowered his S&P 500 price target from 5,330, which he had set in December, to 4,800. The new level is still 23 percent above where the index closed on Friday.
He anticipates that government spending, business investment, and consumer demand will all support growth.
It’s a strong economy, according to Stoltzfus.
