The S&P 500 will soon wrap its best month in more than a year. Even a limp to that finish line that seems to be playing out won’t move the needle on that.

One particularly frustrating aspect of 2023 for investors has been waiting for a recession that never came, as many Wall Street banks also bet on that happening. BCA Research, who provides our call of the day also expected a pullback, and say that is now inevitable for 2024, possibly crushing stocks by 27% from current levels.

“We do not expect any further rate hikes in the U.S. over the coming year unless inflation significantly picks up. However, investors are pricing in too much easing before a recession arrives, and too little once it does,” BCA strategists warned in their outlook that published on Monday.

And stocks are “likely to decline significantly in response to a recession,” leaving the S&P 500 trading between 3,300 and 3,700 next year, they say. That would send the index below its October 2022 lows, as their chart shows:

The strategists rattle off a list of contributors to that recession: rapidly depleting U.S. household savings, and weak lending standards, loan demand and credit growth on both sides of the Atlantic. That’s as they expect the full impact of rate hikes over the past year will likely manifest itself during the next recession or economic boom.

BCA’s bearish stock view is also based on peak-to-trough declines in earnings per share for U.S. stocks that they note average 5% to 15% in “normal” recessions, barring a few bigger exceptions. While not the worst-case scenario, they see a decline in earnings at a “high single digit rate,” given 12-month forward earnings dropped 6% in 2022 without real consumption contracting.

Investors can also forget about the easy money that drove assets between 2009 to 2021. “Neither a prolonged zero interest rate policy, nor the sustained use of quantitative easing as a monetary policy tool, are likely to emerge during the next recession. Interest rates are likely to be considerably higher on average over the next decade than they have been over the past decade,” say the strategists.

So how to prepare for all of the above? “In combination with a meaningful decline in long-maturity government bond yields, a recessionary scenario would imply a very substantial decline in the U.S. stock-to-bond ratio, which would strongly justify an underweight stance toward equities within a global multi-asset portfolio,” says BCA.

They say growth stocks will help drive outperformance for U.S. equities, but they can’t justify an active overweight position in an index that is so driven by a narrow group of names — the Magnificent Seven tech dream team.

In the case of big driver Nvidia for example, further revenue gains and a further push for markets is hinging on whether the chip group’s “customers are successful in commercializing large language models over the coming year,” they say.

They recommend bearish to underweight positions on industrial metals and a neutral stance on oil and energy. In the case that a recession is avoided, they expect crude prices to top $110 a barrel next year.

They are bullish on gold, which has been on a run lately, as they see “multiple tailwinds of support” from falling real bond yields. A ceasefire from the war in Ukraine would be an opportunity to sell, though they are sticking to that overweight stance for now.

Note, BCA seems to be standing out with its bearish views. Deutsche Bank, Bank of America and RBC are among a list of Wall Street banks predicting an S&P 500 at 5,000 or higher to end next year.

So last word goes to the optimists.

Written by: Barbara Kollmeyer @MarketWatch

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