Valuations

Rising stock prices and improving economic data have us re-examining our bearish thesis, but we still see deterioration in leading labor market indicators and expect it will eventually culminate in a recession. We reiterate our defensive investment recommendations.

This week, we cover the main questions we fielded during our latest client trip in Europe. Among the many topics broached are Europe’s recession odds, the impact of China’s stimulus, and the outlook for European markets.

It is too early to say that the US labor market has turned the corner. We assign a 60% chance that the US will enter a recession over the next 12 months, with the downturn likely to begin in the first half of 2025. Accordingly, investors should underweight equities.

The Nifty Fifty bull market of the early seventies was a mania in which investors got carried away chasing after a subset of prized growth stocks. While we do not think the Magnificent Seven stocks are in a bubble, they do have some parallels with the growth stars of 50 years ago.

After resisting the consensus narrative in 2022 that a US recession was imminent, and then predicting an immaculate disinflation for 2023, the Global Investment Strategy team has joined the dark side and is now expecting a recession to start in the US within the next six months. Accordingly, we recommend that investors underweight stocks and overweight government bonds.