Investing.com – US Economy Outlook

According to BCA Research, the consensus view of a soft landing for the US economy is overly optimistic. They predict that the world’s largest economy will enter a recession later this year or in early 2025.

“We resisted the consensus narrative in 2022 that a US recession was imminent,” stated analysts from BCA Research in a note dated September 27. “We then predicted an immaculate disinflation for 2023, which kept us tactically bullish on stocks. But now we have joined the dark side and are calling for a recession to start within the next six months.”

Stocks rallied when the Fed cut rates by 50 basis points earlier this month, reminiscent of January 2001 and September 2007, which marked the beginning of significant easing cycles in this century.

In both instances, the Fed’s unexpected 50 bps rate cuts resulted in immediate gains for the S&P 500—5.0% in 2001 and 2.9% in 2007. However, stocks faced significant declines in the following months, despite initial optimism. This time, analysts believe the Fed is again lagging behind the curve.

“We continue to expect the US to succumb to a recession later this year or in early 2025.”

The US unemployment rate has risen sufficiently to activate the Sahm rule, indicating recession likelihood, along with other worrying economic indicators. Furthermore, income growth is forecasted to decline in the upcoming quarters, restraining spending growth.

“We were tactically bullish on stocks for most of 2023, moved to benchmark early this year, and then went underweight at the end of June,” BCA Research mentioned. “We expect the S&P 500 to drop to 3800 during the coming recession.”

Consequently, analysts recommend that investors underweight stocks and overweight government bonds. They predict the 10-year Treasury yield will drop to 3% by 2025, while the fed funds rate may reach 2%. The US dollar is expected to weaken slightly in the near term, but should strengthen again during the successive recession. The yen is the favored currency looking ahead to 2025.