BCA Research says odds of a global recession are rising, not falling
Timothy Moore
While global equities have been racing higher to start 2024, BCA Research’s second-quarter strategy outlook reads as a reality check for bulls.
Peter Berezin, chief global strategist at the firm, said his best guess is that the next global recession will start towards the end of 2024 or early 2025. He puts the odds of a soft landing for the US economy at 10 per cent.
BCA sees the potential for another final surge higher in the S&P 500 as downside risks rise.
“On average, the S&P 500 has peaked six months before the start of a recession,” Berezin said. “If the next recession begins towards the end of this year or in early 2025, this provides a short window for equities to move higher.”
However, investors should prepare for a sharp drop if BCA is proved correct. “Our base case is that the S&P 500 will fall to as low as 3600 during the next recession. Such a price target may seem very pessimistic, but it is built on only two assumptions, both of which are quite reasonable, in our view.”
Berezin said the first assumption is that the forward price-to-earnings ratio troughs at 16 (it is currently 21). “That is not especially onerous given that the average forward P/E multiple between 2012 and 2019 was 15.8 – a period that did not even encompass a recession.”
The second assumption BCA is making is that forward earnings estimates fall by 10 per cent from current levels. “Again, this is not a terribly onerous assumption,” Berezin says, adding that earnings estimates have typically declined by more than 10 per cent during recessions.
“The downward risk to earnings is amplified by the fact that profit margins remain quite elevated. Our measure of forward profit margins – calculated by dividing forward price-to-earnings by forward price-to-sales – stands at 12.9 per cent, well above the average of 10.9 per cent between 2012 and 2019.”
