US stocks could slide a further 25% if the economy tips into a recession, with risks to a sustained equity rally mounting, according to Deutsche Bank AG strategists.
(Bloomberg) — US stocks could slide a further 25% if the economy tips into a recession, with risks to a sustained equity rally mounting, according to Deutsche Bank AG strategists.
With company profits set to drop, stock valuations still high and recession risk looming, the fundamental picture for stocks is challenging, strategists led by Binky Chadha wrote in a note dated Sept. 7. Still, investor positioning in equities is low, they added.
“The outlook looks relatively binary: in the event we slide into a recession, the selloff has much further to go,” Chadha said, reiterating that the S&P 500 Index could slide to as low as 3,000 points in his worst-case scenario — nearly 25% lower than Wednesday’s close. If recession is avoided, “we expect the market to rally back sharply to its prior peaks,” he said. His base-case scenario still sees stocks rising by year end.
Among the main risks for stocks are high valuations amid “elevated late-cycle earnings,” the strategists wrote. While the second-quarter results season was stronger than feared, that was due mainly to the impact of higher oil prices on energy companies. Profit growth could slow or even fall from here on, Chadha said.
His outlook is consistent with peers at Goldman Sachs Group Inc. and Morgan Stanley, who also said this week that stocks could slide to fresh lows amid slowing economic growth. The S&P 500 has already erased about half of its summer gains as earnings optimism faded and investors grew worried that the Federal Reserve would stay hawkish for longer.
All eyes today will be on Fed Chair Jerome Powell’s speech for clues on how hawkish the central bank plans to be to fight soaring inflation as recession risks mount.
Chadha also said the stock market is ripe for a new squeeze starting in October, which may push the benchmark higher, with positioning in equities low and inflation data less likely to surprise.
While warning of the binary risks, Chadha maintained his year-end target for the S&P 500 to rise to 4,750 points — up 19% from current levels. “Leading indicators are consistent with a descent into recession but not signaling we are in one already,” he said.
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