Here’s the worst-case scenario for stocks, according to Goldman, Deutsche Bank and Bank Of America

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Topline

Amid heightened recession fears, major firms on Wall Street are now warning that the market selloff, which has been on track for seven straight weeks of losses, could worsen, with stocks set to plunge around 20% extra if the economy is heading into an impending recession.

Highlights

Recession fears rose this week, after major retailers warned of inflationary pressures eating away at quarterly earnings and the Federal Reserve pledged it ‘won’t hesitate’ to keep raising rates interest until the price spike subsides.

The S&P 500 could plunge to 3,000 if the economy slips into recession in the near future, which would represent a drop of about 24% from the index’s current level of around 3,900, according to a recent note from the Head of US and Global Equities at Deutsche Bank. strategist, Binky Chadha.

While he has a price target of 4,750 for the S&P 500 (more than 20% higher than current levels) and predicts a “relief rally” by the end of the year, there are risks that a “prolonged sell-off” could turn into a “self-fulfilling recession”. “, said Chadha.

Market losses could intensify if the economy falls into recession, notes Goldman Sachs chief US equity strategist David Kostin, who puts a 35% chance of a slowdown over the next two years.

He points to historical data showing that in 12 recessions since World War II, the S&P 500 has fallen 24% on median and 30% on average: based on this pattern, the stock market could fall 11 % to 18% more than current levels. , predicted Kostin in a recent note.

Bank of America strategists, meanwhile, have warned that a scenario of stagflation – slowing economic growth and high prices – could create a “worst-case” scenario for stocks where the S&P 500 falls to 3. 200, a drop of about 18% from current levels.

Crucial quote:

“Inflation is proving sticky and Fed forecasts call for a rate hike cycle that has historically ended in recession more often than not (8 out of 11 or 73% of the time), with the Fed acknowledging and accepting this risk “, said Deutsche Bank. Shadha said.

To monitor :

The recent sell-off in the market, coupled with the prospect of aggressive rate hikes from the Federal Reserve as it tries to fight inflation, has certainly “raised fears of recession,” the economist said. Head of Moody’s Analytics, Mark Zandi. It puts the odds of a recession at 33% in the next 12 months and nearly 50% within 24 months, higher than some of its peers.

Tangent:

Investors should be wary as “recession risks take over” the markets, according to Savita Subramanian, equity and quantitative strategist at Bank of America, in a recent note. Not only are the chances of a stagflation environment increasing, but current market conditions are reminiscent of the 1999-2000 dot-com bubble, characterized by an “acceptance of the unthinkable,” she says.

Further reading:

Investors have “nowhere to hide” as the S&P 500 nears bear market territory (Forbes)

The Dow Jones falls 1,100 points, the stock market sell-off continues as major retailers warn of rising cost pressures (Forbes)

Dow jumps 400 points after Powell says the Fed “will not hesitate” to keep raising rates to fight inflation (Forbes)

Warren Buffett’s $51 Billion Stock Market Shopping Spree: Here’s What He’s Buying (Forbes)

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