S&P 500 Has Plenty of Room To Fall As Recessionary Warnings Get Louder: BofA

The recession drumbeat is becoming increasingly louder, and investors are overly optimistic about Fed rate cuts and not worried enough about an economic slowdown, Bank of America Securities Chief Investment Strategist Michael Hartnett said Monday. 

Corporate earnings are likely to tumble in the next months, according to the BofA Global EPS Growth Model, with EPS falling by 16% year-on-year by August. The latest March ISM Manufacturing PMI was 46.3, the lowest since May 2020, and the non-manufacturing ISM was 51.2, the fourth lowest level since the Great Recession, the BofA strategist said.

In the previous 70 years, a recession happened 11 out of 12 occasions when the manufacturing ISM fell below 45, according to BofA.

Weakening manufacturing ISM indicates the U.S. labor market will shrink in the next months. In recent quarters, U.S. banks have also tightened lending rules to small businesses. A credit bottleneck is projected to worsen and is strongly linked to small business layoffs. 

U.S. ISM Manufacturing PMI; shaded areas indicate U.S. recessions – Chart: TradingView

Read also: Shocks For Stocks: Traders Bet On Another Fed Rate Hike In May After Strong Jobs Data

BofA Says Sell The Last Rate Hike: According to BofA, there is still plenty of room for the S&P 500 to fall further. Since 1929, two-thirds of S&P 500 peak-to-trough declines have occurred during, rather than before, U.S. recessions. In eight of the previous 10 recessions, the S&P 500 fell by more than 20%, BofA highlighted. 

The following are the top bets for the onset of the recession, according to the strategist: 

• Long T-bills – Ishares 1-3 Treasury Bond ETF SHY : Until the Fed cuts sharply and EPS projections dip, cash outperforms.
• Long gold – SPDR Gold Trust GLD: The precious metal is considered the best U.S. dollar debasament play.
• Long yield curve steepeners.
• Short over-owned assets that are prone to deleveraging/revenue reductions: U.S. tech stocks or Invesco QQQ Trust Series 1 QQQ, European luxury, industrial/defense equities and U.S. private equity. 

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