Economists at Mizuho Securities are concerned about the Federal Reserve’s ongoing pursuit of a “soft landing” for the economy in the face of persistent high inflation. Despite raising its benchmark interest rate to a range of 5%-5.25% over the past year, the Fed still plans for two more rate hikes in 2023. The challenge lies in tackling “sticky” inflationary factors that could lead to more economic damage than anticipated.
According to the Mizuho team, the current optimism among investors, who believe that U.S. stocks are priced for a perfect soft landing, may not align with reality. They highlight that forward expectations indicate a projected 12% earnings growth in 2024, following a lackluster 1%-2% advance this year. This suggests that the market is discounting any further economic slowdown.
As the Federal Reserve continues its efforts to bring inflation back down to its target of 2% annually, the potential risks and uncertainties loom large. The economy’s trajectory remains uncertain, and it remains to be seen if the central bank’s measures will achieve the desired outcome.
A Challenging Road Ahead: Recession Looms for Equity Investors
The optimistic outlook of equity investors regarding a soft landing scenario is facing major skepticism. According to economists at Mizuho, achieving this desired outcome seems “extremely difficult,” instead pointing towards a lengthy and shallow recession anticipated to commence early next year.
Market Performance
While the S&P 500 index (SPX) demonstrated a marginal increase of 0.3% on Tuesday, reaching approximately 4,421, it has displayed an overall growth rate of 15% throughout the year, as reported by FactSet. In line with this positive trend, the other major U.S. stock indexes also showed upward momentum. Investors anxiously await the release of the June consumer-price index, a significant gauge of inflation, scheduled for Wednesday. The Dow Jones Industrial Average (DJIA) boasts a 3% increase since the beginning of the year, while the Nasdaq Composite Index (COMP) exhibits an impressive year-to-date advancement of 31%, as per FactSet data.
Bleak Economic Outlook
Contrary to the Federal Reserve’s attempt at a soft landing, economists at Mizuho express a higher likelihood of an impending recession. Furthermore, they emphasize the potential for a deeper and more prolonged economic downturn. Consequently, Mizuho economists hold a dissenting view against the consensus of a bull market, projecting a correction that could bring the S&P 500 index below 4,100.
Despite the optimistic sentiment prevailing among equity investors, these cautious forecasts from Mizuho economists highlight potential challenges and indicate a rocky road ahead.