U.S. stock market warns of recession, but some investors see it as just noise – Bloomberg

2023-09-25 00:31:30

Small-cap and industrial stocks are falling in the U.S. stock market, a classic signal of a recession, but this is unlikely for now as stocks have already outperformed expectations this year. Some investors see it as nothing more than noise.

The S&P 500 Capital Goods and Services Index has fallen 8% since peaking on Aug. 1 and is on the brink of a correction.Due to soaring oil prices, the U.S.major airlinesThis is because several companies have downwardly revised their profit forecasts for the third quarter. The Russell 2000, a small-cap index, has fallen more than 11% since its July 31 closing high, regarding twice the decline of the S&P 500 index over the same period. Sharp declines in small-cap and industrial stocks typically occur during economic downturns.

Measuring Returns

S&P 500 sector median performance following recession start and end dates

Source: Ned Davis Research Group

There are other signs of trouble in the stock market. The S&P 500 is heading for a quarterly decline for the first time in a year. Last week was the steepest decline since March 10, when Silicon Valley Bank collapsed. It has fallen 2.8% since the 20th, when the Federal Open Market Committee (FOMC) indicated it would “keep interest rates high for a longer period of time.”

In response, investors are pulling out of global equity funds at the fastest pace since December, according to Bank of America strategists.

Still, there is hope for the stock market. As earnings season approaches, corporate earnings might become more important to stock prices than interest rates, according to a Bloomberg Intelligence model. BI data shows companies’ profits are expected to decline by just 1.1% in the third quarter, with profits expected to continue rising for at least a year therefollowing.

Kim Forrest, founder and chief investment officer of Boke Capital Partners, said, “With earnings season just a few weeks away, there aren’t that many companies that revise their profit and sales targets downward,” adding, “I don’t know when there will be a recession.” “I don’t know if it’s going to come, but it’s going to come. But big American companies aren’t signaling an imminent threat.”

For some investors, the recent decline is also a buying opportunity. A Bloomberg survey of economists predicts economic growth will slow until the middle of next year, then pick up once more.

“It would be premature to say that the stock market is showing signs of a recession,” said Ed Crissold, chief U.S. strategist at Ned Davis Research. “But we’ll have to wait a few more weeks to see where the year-end momentum is.” Ned Davis has a year-end target for the S&P 500 of 4,500, predicting that the U.S. economy might slow in the first half of 2024.

news-rsf-original-reference paywall">Original title:Stocks Flash Recession Warning as Trouble Spreads to Industrials(excerpt)

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