The S&P 500 could slide another 33% in a ’70s-style inflation environment: Société Générale


The bearish stock market is probably not over, and it could take much longer to function if the economy falls into a 70s-style stagnation scenario, a stock strategist warned this week. Wall Street.

The S&P 500 officially entered a bear market last week, with a drop of more than 20% from its record on January 3rd. The U.S. equities benchmark is on track for a historically ugly half-year yield, as markets expect a more restrictive monetary policy to control inflation, but fear interest rates will rise to at levels that cause a recession.

“We have been and continue to have a‘ risk reduction, defensive and devaluation ’mentality for 2022, as the Fed’s rises in the current recession should generate collateral damage, which will lead us to adopt a bearish position on U.S. consumers, finance and small businesses. maximums, ”said Manish Kabra, head of U.S. equities at Societe Generale, in a note Tuesday. “But the compromised fight against inflation looks set to trigger a domino effect, with housing and credit markets similar to the next falling dominoes.”

If the Fed fails to control prices, a 1970s-style inflationary shock followed by a recession could boost the S&P 500 SPX,
-0.09%
it was down 33% from its current level to trading at 2,525, Kabra said.

The S&P 500 is down 33% on average during a typical recession, but “the current 24% drop in stocks suggests that we’ve discounted 72% of an average recession (i.e. a 72% chance of recession has a price) “, according to Société. Report of the General. “At 3,200, the S&P 500 will completely discount a typical recession.”

The S&P falls 33 percent on average during a typical recession, and the current 24% drop suggests a 72% chance of a recession comes at a price, SocGen says. SOURCE: FACTSET, BLOOMBERG, REFINITIVE, SG CROSS ASSET RESEARCH / US CAPITAL STRATEGY

The S&P 500 gained 5 points, or 0.15%, to 3,765 on Thursday, after Federal Reserve Chairman Jerome Powell confirmed his plan to fight inflation on Wednesday and said the U.S. economy could withstand steep type rises. The Dow Jones Industrial Average DJIA,
-0.32%
fell 70 points, or 0.23% to trade at 30,412.

Read more: Dow, S&P 500 rises after Powell says Fed is not trying to provoke recession with higher interest rates

“We continue to see the fair value of the S&P 500 at 3,850 and reaching 5,000 in 2024, when the inflationary shock should have moderated, it is likely that the Fed has not only just finished rising, but has also started a cycle of US rate cuts and 10. -Annual performance TMUBMUSD10Y,
3.044%
it is back closer to 2%, ”Kabra wrote in the report.

10-year US Treasury yield TMUBMUSD10Y,
3.044%
note fell 14 basis points to 3.04% on Thursday. Treasury yields move in the opposite direction to price.

Stagnant growth in the style of the 70s + lower multiples = S&P 500 to 2525. SOURCE: FACTSET, BLOOMBERG, REFINITIVE, SG CROSS ASSET RESEARCH / AMERICAN CAPITAL STRATEGY

Consumers will continue to feel the impact of rising prices for another year amid negative wage growth, as retail gasoline prices hit all-time highs and mortgage rates rise to their highest level since 2008 .

Read more: “The savings and income needed to qualify for a home loan have skyrocketed”: 5 ways in which the real estate market left buyers in the dust, and is not over yet

“The main reason for our bearishness with the American consumer has been the negative real wage growth of the last four quarters,” Kabra said. “Also, real wages are unlikely to be positive until next summer.”



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