Bulls and bears disagree
Bear or bull market ahead? Experts are divided.
The case for a bear market
The market pessimists — or as they prefer to be known, realists — see a number of insurmountable hurdles for the market ahead. Chief among them is a recession. Seven of the past nine Fed rate-tightening cycles have resulted in a recession, according to Crossmark Global Investments.
Even economist and market strategist Ed Yardeni of Yardeni Research, whose S&P target of 4600 puts him at the forefront of the bulls, sees a 40% chance of the economy entering a recession in the second half of the year. At the very least, he acknowledges, tighter lending standards stemming from the recent regional banking crisis could restrict the flow of credit, putting a damper on growth.
Goldman Sachs economists see only a 35% probability of recession over the next 12 months. But the consequences would be dire, says Goldman’s chief U.S. stock strategist David Kostin and his team: “If the U.S. enters a recession, we expect the S&P 500 would decline to 3150.”
Whether or not the overall economy falls into recession, corporate profits — the engine that drives stock prices — are likely already in one, defined as at least two straight quarters of year-over-year declines.
The main problem is the squeeze on profit margins, which peaked in early 2022 and have been contracting for four straight quarters.
Finally, geopolitical tensions could escalate in a number of places across the globe, from Ukraine to China, to roil the market. “The geopolitical situation is as risky as it’s been maybe in our lifetimes,” says Bob Doll, chief investment officer at Crossmark Global.
The case for a bull market
The optimists have lately had some momentum on their side. As of early June, the S&P 500 is up about 14% so far for this year and about 22% since the market’s low last October. The current fixation on fretting about the next recession is counterproductive, says Brian Belski, chief investment strategist at BMO Capital Markets. “The market is so obsessed with making these recession calls that we’ve completely forgotten that the stock market discounted this by going down 25% last year,” he says.
Partly because an impending recession has been so well telegraphed, it might in fact never arrive, says Yardeni, who sees a 60% chance of a soft landing. From a contrarian perspective, all the fear mongering is a good thing, he says. “The market likes to climb a wall of worry — it’s great that so many people think a recession is coming.”
His theory is that we’ll be spared an economy-wide recession because a “rolling recession” is already coursing through some sectors and industries, starting with consumer goods last year and perhaps moving next to commercial real estate and possibly, to a lesser extent, autos.
But even if you believe that a recession in the traditional sense is inevitable, it may not come as soon or be as bad as you fear. Michael Arone, chief investment strategist at State Street Global Advisors, doesn’t see a recession until 2024 and based on the current outlook, thinks we’re headed for a “garden variety” recession that may only last a couple of quarters, with both businesses and consumers heading into the slowdown in good shape. “That’ll help soften the blow,” he says.