According to These Bearish Strategists, the S&P 500 Could Sink as Low as 3,100 Next Year

The S&P 500 is on the verge of concluding its most impressive month in over a year, with even a lackluster finish unlikely to diminish this achievement. However, for investors, the year 2023 has been characterized by a frustrating anticipation of a recession that has yet to materialize, defying expectations from both individual investors and major Wall Street banks. BCA Research, the source of our featured analysis, shared this anticipation of a pullback, asserting that such a downturn is now inevitable in 2024, potentially resulting in a substantial 27% decline in stock values from their current levels.

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In their outlook published on Monday, BCA strategists cautioned against an overly optimistic outlook, emphasizing that while they do not anticipate further interest rate hikes in the U.S. unless inflation experiences a significant uptick, investors are currently pricing in an excessive degree of monetary easing before a recession arrives and too little once it materializes.

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The strategists at BCA foresee a significant decline in stocks in response to an impending recession, envisaging the S&P 500 trading within the range of 3,300 to 3,700 next year. This projection would drive the index below its October 2022 lows, marking a substantial downturn. They attribute this anticipated recession to several factors, including the rapid depletion of U.S. household savings and weak lending standards, loan demand, and credit growth on both sides of the Atlantic. According to BCA, the full impact of the rate hikes over the past year is likely to manifest itself during the next recession or economic boom.

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The bearish stance on stocks by BCA is further supported by their analysis of peak-to-trough declines in earnings per share for U.S. stocks. They note that in "normal" recessions, these declines average between 5% to 15%, with a few exceptions being more significant. While not predicting the worst-case scenario, BCA anticipates a decline in earnings at a "high single digit rate," considering that 12-month forward earnings dropped 6% in 2022 without a contraction in real consumption.

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BCA's pessimistic outlook also extends to the era of easy money that characterized the period between 2009 and 2021. They contend that neither a prolonged zero interest rate policy nor the sustained use of quantitative easing is likely to emerge during the next recession. Instead, they predict that interest rates will be notably higher on average over the next decade compared to the past decade.

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To navigate this anticipated scenario, BCA suggests preparing for a substantial decline in the U.S. stock-to-bond ratio, justifying an underweight stance toward equities within a global multi-asset portfolio. While they expect growth stocks to outperform, they caution against an active overweight position in an index heavily influenced by a select group of tech giants.

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In terms of specific market recommendations, BCA suggests bearish to underweight positions on industrial metals and a neutral stance on oil and energy. In the event a recession is averted, they anticipate crude oil prices exceeding $110 a barrel next year. On the bullish side, they express optimism about gold, citing multiple tailwinds of support due to falling real bond yields. Although a ceasefire in the Ukraine conflict could be an opportunity to sell, BCA maintains an overweight stance on gold for the time being.

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It's worth noting that BCA's bearish views contrast with more optimistic forecasts from other major Wall Street banks such as Deutsche Bank, Bank of America, and RBC, which predict an S&P 500 at 5,000 or higher to conclude next year.

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