The US avoiding a recession could actually be horrible for stocks, TS Lombard said.
That’s because the Fed would likely keep interest rates high in a “no landing” scenario, weighing on equities.
Fed officials aggressively hiked interest rates last year to control inflation, a move that caused the S&P 500 to lose 20%.
The US avoiding a recession would actually be “treacherous” for stocks, TS Lombard warned this week.
According to the research firm, investors could actually see more losses if the economy manages a “no landing” scenario, meaning the US avoids a slowdown and a recession and instead continues to remain strong.
That’s because the Federal Reserve would likely keep interest rates high, whereas central bankers have traditionally cut interest rates by at least 200 basis points when faced with a recession, strategists said.
Already, Fed officials have hiked rates 450 basis points over the last year to tame high inflation. That caused the S&P 500 to lose 20% in 2022. Though most analysts have forecasted interest rates reaching 5% this year, rates could soar to 6.5% if the US avoids a recession, strategists estimated.
“Far from being a benign scenario, ‘no landing’ could prove treacherous for investors, bringing back the market conditions that prevailed throughout most of 2022. The market would return to trying to keep up with ever-rising terminal rate expectations. And this would likely lead to a prolonged equity de-rating, undoing much of the multiple expansion stocks have enjoyed since last October,” TS Lombard said in a note on Wednesday.
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The market has already given up some of its gains from the start of the year as investors price in more rate hikes, with rates also staying higher for longer.
For its part, TS Lombard believes the US could enter a mild recession by mid-year, echoing forecasts from other Wall Street analysts. That’s because February’s economic data could show a much weaker economy, which can also tip into recession quickly, strategists said.
A small downturn could compel the Fed to cut interest rates toward 3% by the end of the year, easing up financial conditions and boosting stocks.
Other bullish market commentators have made the case for rate cuts, which would fuel a strong year for stocks. Fundstrat’s Tom Lee said Fed officials could pull back on monetary tightening efforts and no longer “crush the market” this year, which could lift the S&P 500 to retest its all-time-high.