According to a recent note from Peter Berezin, the U.S. stock market is expected to experience a significant downturn.
Berezin is a financial analyst and strategist, serving as the Chief Global Strategist at BCA Research, a firm specializing in global investment research. He focuses on offering strategic investment advice and economic analysis, covering global economic trends, monetary policy, and asset allocation strategies. Berezin is known for his expertise in global macroeconomic analysis and financial markets, providing insights to help investors navigate complex economic landscapes.
Per a recent report by Matthew Fox for Markets Insider, Berezin, who is noted for having one of the most bearish outlooks on Wall Street, predicts that the S&P 500 will drop by 32%, reaching 3,750 in 2025. He attributes this anticipated decline to the Federal Reserve’s inability to prevent a recession.
Berezin’s forecast, detailed in a recent note, suggests that the U.S. will enter a recession either later this year or in early 2025. He challenges the prevailing soft-landing narrative, stating that growth in the U.S. and globally will slow sharply. A key aspect of his bearish outlook is the belief that the Federal Reserve will be slow to cut interest rates, only taking significant action once a recession is evident, which he argues will be too late to mitigate the economic downturn.
A weakening labor market supports Berezin’s pessimistic view. He highlights a notable decline in job openings from their post-pandemic peak and points to reductions in the quits rate, hiring rate, and downward revisions to job reports for April and May. Berezin notes that the unemployment rate edged up to 4.1% in June from 4.0%, indicating some weakness in the job market.
Berezin warns that rising unemployment could prompt consumers to reduce spending as they build up precautionary savings. He believes this reduction in spending could coincide with tighter borrowing conditions due to increasing delinquency rates. Berezin thinks that as households face financial constraints, a negative feedback loop may develop with reduced consumer spending leading to less hiring, higher unemployment, and further reductions in spending.
Berezin is skeptical about the Federal Reserve’s ability to counteract the economic decline through interest rate cuts. He emphasizes that the crucial factor is not the federal funds rate itself but the actual interest rates paid by households and businesses. For example, even if the Fed cuts rates, the average mortgage rate for consumers, currently around 4%, could continue to rise compared to current rates of approximately 7%.
Berezin also highlights that these dynamics could lead to more defaults, particularly impacting the banking sector. He points out that problems faced by regional banks last year have not been resolved and could resurface as financial conditions tighten.
Last week, the prominent analyst shared his insights on the U.S. stock market, economic growth, and the future of China in an interview with David Lin.
Berezin explained his transition from a moderately constructive stance on the stock market to a bearish outlook. Berezin used the analogy of a glass of water placed in the freezer to describe the current economic situation. Just as a glass of water takes time to freeze, the economy, previously heated by factors like pandemic savings and low mortgage rates, is now cooling down. Berezin emphasized that the economic “insulation” provided by these factors has worn thin, leading to a higher risk of recession as the effects of tight monetary policy take hold.
Berezin noted that while the stock market often diverges from the real economy, the current bullish sentiment in tech stocks could fade if a recession hits. He pointed out that the S&P 500’s performance is heavily influenced by a few large tech companies, masking the underlying weaknesses reflected in the broader market indices like the equal weight index and small caps. Berezin warned that consumer spending, a critical driver of the economy, is likely to slow down due to depleted pandemic savings, low savings rates, and rising delinquency rates on credit cards.
Berezin highlighted the challenges faced by small businesses, including slowing revenue growth and persistent cost pressures. He referenced a report indicating that 43% of small businesses were unable to pay their rent in full due to economic headwinds. Berezin explained that the financial strain on small businesses is likely to worsen as more businesses face higher loan rates, despite potential Federal Reserve rate cuts.
Discussing the labor market, Berezin noted that the unemployment rate is beginning to rise, a trend that historically signals an impending recession. He stressed that the Federal Reserve’s current stance on maintaining higher rates is driven by a cautious approach to avoid reigniting inflation. Berezin suggested that while a significant rate cut could potentially avert a recession, the risk of loosening financial conditions too much could lead to a resurgence of inflation.
Berezin updated his S&P 500 target to 3750, explaining that this projection is based on the assumptions of a forward P/E multiple dropping to 16 and earnings estimates being cut by about 10%. He argued that these assumptions are not overly pessimistic, given historical averages and the current high profit margins, which are likely to revert to mean levels. Berezin warned that a slowdown in consumer spending would initiate a feedback loop, reducing corporate earnings and leading to further economic contraction.
Berezin expressed skepticism about the ability of AI and tech stocks to sustain their current valuations during a recession. He pointed out that while AI has the potential to boost productivity, it may take years for companies to monetize these advancements effectively. Berezin compared the current hype around AI to the early days of the internet, where it took significant time for firms to profit from technological innovations.
In terms of investment strategy, Berezin recommended focusing on defensive sectors such as utilities, consumer staples, and healthcare. He highlighted healthcare as a particularly attractive sector due to its relative pricing power and structural tailwinds from an aging population and advancements in drug discovery through AI.
Berezin also discussed the potential impact of the upcoming U.S. presidential election on economic policies and markets. He noted that while there is speculation about the effect of a Trump victory on bond yields and fiscal policies, the actual outcomes could be more complex. Berezin suggested that potential tax cuts could face significant political opposition and that spending restraint might offset any stimulative effects of tax reductions.
Turning to China, Berezin drew parallels between China’s current economic situation and Japan’s in the early 1990s. He highlighted China’s mounting debt and declining property market as significant concerns. Berezin predicted that without substantial fiscal stimulus, China could face deflationary pressures rather than inflation. He also discussed the potential for decreased consumer spending in China due to falling property values and the broader implications for global markets, including reduced demand for base metals.
Berezin warned of the geopolitical risks associated with China’s economic slowdown, suggesting that strained international relations could exacerbate economic challenges. He also discussed the potential for tightening regulations on gold purchases in China as a form of capital control, which could limit the upside for gold prices despite strong demand.
In light of these economic and geopolitical uncertainties, Berezin advised investors to reduce their exposure to stocks and increase their holdings of long-term bonds. He highlighted the deflationary pressures from China’s slowdown and the potential for lower bond yields as key reasons for this strategy.
Featured Image via Pixabay
