The U.S. stock market might face significant challenges ahead, as warned by BCA Research. In a recent note to clients, Peter Berezin, BCA Research’s chief global strategist, cautioned that a recession could hit the economy either later this year or in early 2025, contrary to widespread expectations of continued growth.
Berezin’s forecast is based on an anticipated slowdown in the labor market, which he believes will substantially impact consumer spending—an essential engine of economic growth. Should this scenario unfold, Berezin predicts that the S&P 500 could plummet to 3,750, a stark 30% drop from its current levels.
The relationship between inflation and unemployment, encapsulated in the “Phillips curve,” underpins Berezin’s analysis. “The reason the U.S. avoided a recession in 2022 and 2023 was because the economy was operating along the steep side of the Phillips curve,” Berezin explained. “When the labor supply curve is nearly vertical, weaker labor demand will mainly lead to lower wage growth and falling job openings. In other words, an immaculate disinflation.” This delicate balance, Berezin suggests, may no longer hold, leading to a more pronounced economic downturn.
Berezin’s outlook extends beyond the U.S., predicting widespread economic difficulties with significant slowdowns in both Europe and China. These global challenges could further dampen international growth prospects and negatively impact global stock markets.
In recent months, the stock market has experienced notable volatility. The Dow Jones Industrial Average hit a historic high in mid-May, surpassing 40,000 for the first time. However, the market has since retreated from these peaks. As of Monday morning, major indexes slipped as investors braced for crucial jobs data from the Labor Department, with the S&P 500 down about 12 points.
The forecast from BCA Research stands out as one of the most pessimistic on Wall Street. This projection comes on the heels of a turbulent year for the stock market. All three major indexes saw significant declines in mid-2023 amid concerns that the Federal Reserve would hike interest rates more aggressively than anticipated and maintain those elevated levels longer. Despite these fears, the markets managed to recover those losses and more, with the S&P 500 surging over 29% since its late October low.
Year-to-date, the benchmark S&P 500 index has risen approximately 15%, the Dow Jones Industrial Average has increased by 3.7%, and the tech-heavy Nasdaq Composite has soared by about 20%. This rebound reflects investor optimism and resilience, yet Berezin’s warning suggests that underlying economic vulnerabilities may soon manifest.
The anticipated recession, Berezin argues, could be precipitated by a notable slowdown in the labor market. As labor demand weakens, consumer spending, which drives a significant portion of the economy, could decline sharply. The Phillips curve model, which illustrates the inverse relationship between inflation and unemployment, supports this view. With a vertical labor supply curve, reduced labor demand could lead to lower wage growth and decreased job openings, potentially ushering in a period of disinflation followed by recession.
Moreover, the potential slowdown in Europe and China could exacerbate the situation, affecting global economic stability. A weakened global economy would likely have a cascading effect on international stock markets, compounding the challenges faced by U.S. investors.
Investors are closely monitoring these developments, particularly in light of recent stock market performance. The Dow Jones Industrial Average’s rise past 40,000 was a significant milestone, but the subsequent decline underscores the market’s volatility. As of mid-morning Monday, the indexes were down as investors awaited key employment data, reflecting the market’s sensitivity to economic indicators.
In summary, Berezin’s warning highlights the precarious state of the U.S. and global economies. While recent market gains suggest resilience, the potential for a significant downturn remains. Investors and policymakers alike must navigate these uncertain waters with caution, preparing for the possibility of a substantial economic and market correction.
