BCA's Ibrahim Warns S&P May Fall to 3600

It’s been quite the year already so far and it’s only may somehow, but a lot of folks who predicted recession this year have and last year have felt burnt. And now we’re pricing in a soft landing, we’re pricing in two Fed cuts. But Rukaya, you write that the odds of a recession starting late 2024 and early 2025 are elevated. What are you seeing that suggests that? Hi Danny, thanks for having me. So I think as we get into a recession it’s first going to look like a soft landing. We’re shifting in narratives from you know the no landing phase. Now we got this week jobs report on Friday. So it’s kind of shifting towards the soft landing narrative. But I think as the the unemployment data deteriorates, as unemployment rate rises, as the labor market deteriorates, we’re already starting to see things like the jobs, the jobs openings rate, the hires rate, the quits rate, these things are all falling. So as this trend continues, I think the narrative is going to shift towards this you know a outlook. And so you know I think that there’s still a runway for the soft landing narrative to continue over the coming months. But eventually you know the unemployment rate is going to take higher and that’s going to like that’s going to lead to concerns about a recession. Rukai, good morning. Well, if this, if this goes forward as you said we’ve got a little bit of runway for soft landing, but it does challenge to use the FX parlance, it challenges the carry in FX and the exceptionalism of the US So therefore from an equity point of view is it just a marginal slowdown drawdown in equities, is it a three percent, 5% drawdown on the scenario that you paint or is it something more significant than challenges the exceptionalism of U.S. equity. You know US equities are already extremely valued, it highly valued. And so I think that that raises the likelihood that they’re more vulnerable to the downside. In our expectation, if we do get this recession late 2024, early 2025, the S&P 500 is most likely going to fall to around 3600 and that’s due to our expectations on growth estimates. And on the forward PE it’s already at 21 that’s highly valued. So I think it’s going to come back down to something that’s more of where it was in the five years prior to the pandemic and that would put us at around 3600 for the S&P 500, 3600. I mean that that is a painful self. I’m trying to see how much that is quickly. That’s about what, 30% lower, a little bit less than that Rukaya, if we get that kind of decline, I mean that that is a big difference. Just just walk me through what the world looks like with S&P at 3600 because Rukaya we’re going to get AUS presidential election. We’re looking at what that might mean for inflation that that is big. Yeah, I mean it like to be clear what our expectation is, it can go down as low as 3600. And so you know there is potential that it’s not going to fall back that low, but I mean in this environment what we’re going to see is that the euro area is right now it’s starting to recover a little bit. And so I think that there is this runway for it to improve a little bit ahead of a recession. But ultimately there’s going to be this headwind from China. We don’t expect the Chinese policy makers to stimulate aggressively. And so you know they haven’t really signaled that there is going to be enough stimulus to really revive the Chinese economy. And so any sort of recovery that we see in the near term in terms of the global manufacturing cycle that’s going to be short lived and you know the global economy is going to ultimately, I mean we don’t expect a very severe recession but a garden variety recession is what we expect and that’s that that’s where we would pin that 3600 floor at. It’s interesting because many people have not spent a great deal of time talking about China in regards to the US exceptionalism. But you are Co joining that inability to deliver a robust 5% growth in China as something which eventually permeates into the US and global perspective more European than US. Yes, definitely more European than USI mean Europe is is high, is much more exposed to China of course than the US But the point being is that you know right now there could be over the near term some optimism about a global manufacturing recovery. You know, we’re seeing things like the global manufacturing PMI break above 50 for the past couple of months and you know, that could sort of prolong the optimism. But eventually because China is not stimulating aggressively, there are still headwinds in the euro area and that’s going to prevent any like any durable recovery in the global manufacturing sector. So yes, China of course is much more relevant when it comes to discussing the euro area than the US but the point being that, you know, the euro area will not be able to escape a recession if the US falls into one. And so you know, this is a global phenomenon that we’re expecting. Yeah, right. The whole U.S. news as the world catches a cold Rukai at Bank of America points out that the amount of junk that are currently trading as high grade securities are at a record. Given what you’re saying, the weakness we could see in equity markets that we’re heading into a recession is our vast parts of this market, many corners just sleepwalking through a possible painful default cycle. Yeah, that’s what we’re expecting. I mean if you take a look at what’s happened to credit over the past few months, I mean the default rate expectations that are embedded in those valuations are extremely optimistic. And so I think that you know As for now the US, let’s let’s be clear, the US economy is still doing well, but we are seeing concerning data like I said from the leading indicators of the labor market. And as we see this data you know continue to point in that direction and lead to a rise in the unemployment rate in this recession, narrative takes hold. I think that’s when you know these other parts of the market are going to wake up to that risk.