About a coin-flip
Given that the economic environment is highly uncertain, several firms are most comfortable stating that a
has about a 50% chance of occurring.
One of those firms is Ameriprise Financial. Russell Price, the firm’s chief economist, laid out reasons to be constructive in his firm’s mid-year outlook webinar: unemployment is historically low, consumers still appear to have plenty of cash, and there’s still pent-up demand for goods.
But inflation is a serious threat to his firm’s outlook, and the fact that it accelerated again in both May and June was a huge red flag for Price and his colleagues, who previously thought price growth had peaked in March. While prices for used cars as well as commodities like lumber and metals have fallen, the cost of oil and gas will likely continue to rise, Price said.
“The adverse scenario that we laid out — which was some version of stagflation where growth is slowing, interest rates are going up, and inflation is kind of lingering longer, which is pressuring some of these earnings — I think that’s more like the base case,” said Anthony Saglimbene, the global markets strategist at Ameriprise Financial, during the webinar.
Citigroup is also of the view that there’s a 50-50 chance of a global recession, said Scott Chronert, a top US equity strategist at the firm, in an interview with Insider. There’s no consensus on when it would come, Chronert said, adding that the depth and duration of a downturn are also difficult to foresee.
On the one hand, solid corporate earnings reports in both Q4 2021 and Q1 2022 are reasons for optimism, Chronert said, as is the fact that profit margins hit an all-time high last year. He thinks that Q2 earnings results will meet expectations but added that he’s watching industrial production data and other reports for hints of weakness.
Inflation is the main threat to the economy, as Chronert said that the US central bank could be willing to incur a recession in order to fully snuff out runaway price growth. Citi’s economists expect inflation to recede to about 3% to 4% from above 9% now — that would represent significant progress, but would still be well above the
‘s 2% target.
Morgan Stanley stopped short of making a definitive call on the economy during what the firm’s team of economists called “the most chaotic, hard-to-predict macroeconomic time in decades” in a note about their outlook. The firm’s base case is still that US GDP will rise 2.9% in 2022, but the economists also warned that the path forward is “rife with risk.”
Mike Wilson, the CIO and strategy chief who leads Morgan Stanley’s US equities team, has a bear case for US stocks that goes hand-in-hand with a recession. It would stem from margin weakness caused by unshakable inflation for input goods and workers, in Wilson’s view, though softening demand and a hawkish Federal Reserve are also serious causes for concern.