Markets have yet to price in recession and falling earnings: Investing.com expert warns

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Investing.com – For much of the year, market participants have waited for the moment when the Fed will take its foot off the accelerator and signal the end of its most aggressive tightening cycle since the 1980s.

According to Morgan Stanley, investors hoped that the world’s most powerful central bank would change course in the near future from a decline of , after which the price rose by more than 14% within two months. But market participants’ focus is now likely to shift away from the Fed’s monetary policy and interest rates. Instead, from now on it will be more up to consumers, who could come under increasing pressure in the coming year, above all because of the Fed’s aggressive tightening, warned the US bank in a statement published on Monday.

“The US economy is likely to feel the impact of this year’s monetary tightening seriously in 2023, as the economic impact of monetary policy changes is typically delayed by around six to 12 months,” said Lisa Shalett, Morgan’s chief investment officer of wealth management Stanley.

For 2023, Morgan Stanley expects weak . According to the expert, sales volume, pricing power and company profits would suffer as a result. “But current earnings expectations and stock valuations don’t seem to reflect that outlook,” Shalett warns.

Going forward, she advises investors to focus more on the consumer and less on the interest rate path. According to the latest data, interest rates are likely to peak at 5.0% to 5.25% next July.

The US economy is heavily consumption-driven. As Shalett writes, consumption accounts for two-thirds of US economic activity, which “will likely determine the timing and depth of the economic slowdown.”

According to the New York Fed model, the US economy has a 38% chance of entering a recession in November 2023. Because of the model’s historical accuracy, once it shows a value above 30%, the probability is probably closer to 100%. .

The US consumer “is likely to influence the timing of actual rate cuts, which historically have been a more reliable sign of the end of a bear market,” Shalett said.

Nevertheless, according to the expert, the consumer is currently holding up quite well, as data such as , , , and show. However, she said there are already early warning signs that consumer spending is slowing. The personal savings rate, which was inflated primarily by government checks during the Corona period, “slid from a high of 33.8% in April 2020 to 2.3% in October 2022 – the lowest level since 2005”.

She also said revolving credit card debt is now at an all-time high and the number of new jobs advertised is declining.

“Taking all of this together, we believe that labor and consumer spending should be watched as they will help determine what’s next for the US economy,” Shalett said.

Looking at the stock market, she says markets have yet to price a slowdown in growth into current stock valuations and earnings estimates.

Since a “politically driven bear market” typically doesn’t end until earnings estimates bottom and the Fed actually starts cutting rates, “that means we’re likely to wait a while before this stock bear market is really over.” , she summed up .

(Translated from German)