U.S. stocks are set to drop more than 30%, as a recession hits the U.S. economy in the coming months, BCA Research predicts. The firm said its models show the recession will come in late 2024 or early 2025. “Going underweight [equities] today. We conservatively expect the S & P 500 to drop to 3750 during the coming recession,” chief global strategist Peter Berezin wrote in a note Tuesday. That suggests 31.5% downside from Wednesday’s close. The calculation is conservative because it assumes that S & P 500 revenue rises in line with nominal gross adjusted product, he explained. “That may be too optimistic,” Berezin said. .SPX 1Y mountain S & P 500’s one-year performance BCA Research sees a number of feedback loops that will weaken the economy. Rising unemployment will cause consumers to raise precautionary savings, while borrowing will become more challenging due to tightened lending standards and high interest rates. “With little accumulated savings to draw on and credit availability becoming more constrained, many households will have little choice but to curb spending,” Berezin said. “Decreased spending will lead to less hiring. Rising unemployment will curb income growth, leading to less spending and even higher unemployment.” Business investment will also see a similar dynamic, as weakening consumer demands causes companies to further scale back expansion plans, he noted. Berezin doesn’t expect Federal Reserve rate cuts to prevent the recession. Absent “overwhelming evidence” of an imminent recession risk, the central bank will be reluctant to cut rates aggressively, he said. Plus, monetary policy may still continue to tighten even after rate cuts begin, he said. Getting defensive Investors should adopt a defensive sector tilt by overweighting consumer staples, utilities and health care, Berezin advised. They should also consider overweighting materials as a hedge against a later-than-expected recession start date and the possibility of increased Chinese stimulus, he said. On the other hand, investors should underweight consumer discretionary stocks, real estate and financials, he said. The call on tech stocks is a bit more difficult, he said. “We are inclined to maintain a modest underweight to IT on the assumption that the sector will falter if a weakening economy dampens sentiment towards richly priced AI stocks,” Berezin said. “However, in order to maintain at least some benchmark exposure to tech, we have a neutral view on communication services ( Alphabet and Meta together account for 46% of the market capitalization of that sector).” Tech has been fueling the S & P 500 to new heights throughout the first half of the year, prompting concerns about the breadth of the rally and raising questions about how strong the economy truly is. While BCA’s view is a departure from the average market strategist on Wall Street, it is notable that many of them have not raised estimates even as the S & P 500 approaches the average target. Based on a CNBC Pro survey , the average market strategist sees the broad-based index hitting 5,401. The lowest view, held by JPMorgan’s Dubravko Lakos-Bujas, predicts the market will pull back to 4,200.
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