Wallstreetcn
2023.09.19 18:46
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Don't be too optimistic about a soft landing, Pimco: High oil prices could lead to a 15% drop in the S&P.

Pimco's managers believe that oil is one of the biggest challenges facing the Federal Reserve. Rising oil prices will push up durable goods prices, harm the economy, and make it difficult for the Fed to meet market expectations of three interest rate cuts next year.

Although many Wall Street insiders believe that the US economy is expected to avoid a recession and that the Federal Reserve will achieve a soft landing, the stock market cannot rest easy.

Erin Browne, portfolio manager at bond giant Pimco, believes that the stock market's pricing does not reflect the risk of a recession, and high fuel costs pose a major threat to the US stock market.

Browne said that stock market investors have not taken into account the possibility of a recession and risks such as rising oil prices, which could cause the S&P 500 index to fall by about 15%.

Browne also said that oil is one of the biggest challenges facing the Federal Reserve. Fed policymakers focus on core inflation, which excludes volatile categories such as food and energy. Rising oil prices will push up durable goods prices, harm the economy, and make it difficult for the Fed to meet market expectations of three interest rate cuts next year.

Browne's expectations for a US recession this year have decreased, and it is now expected that the economy will experience some degree of soft landing. The characteristics of this soft landing are very low GDP growth, but inflation remains high, and the economy is still very vulnerable to external shocks.

Currently, pricing in the swap contract market indicates that investors expect the Federal Reserve to cut interest rates about three times next year, implying that the US economy will weaken. However, US stock analysts remain optimistic about strong stock market earnings and are not affected by the aforementioned expectations of economic weakness. It is estimated by the media that, based on stock-weighted calculations, the consensus expectation in the current market is that US stocks will rise by about 12% next year compared to this year.

Pimco believes that one reason for the above differences is that listed companies have not yet indicated any real protection against their sales. In addition, the expected decline in inflation that will continue until next year will help improve corporate profits.

Furthermore, Browne expects that more consumer-oriented industries and semiconductor companies will replenish their inventories next year, indicating stronger product demand and strong profit growth for companies.

In the event of a recession, Brown predicts that essential consumer goods and defensive sectors such as underperforming healthcare will outperform the market, while cyclical industries such as home builders and industrial sectors, as well as cyclical consumer industries such as air transportation, accommodation, and catering, will underperform.

Earlier this month, Wall Street News mentioned that although the market is no longer worried about a US recession, some Wall Street bears have recently warned against being too optimistic.

Jeremy Grantham, co-founder of Boston Asset Management Company GMO, known for predicting market bubbles, still expects that the Federal Reserve's ultra-aggressive tightening will lead to a recession and drag down US stocks.

Grantham said that low interest rates have pushed up asset prices. Higher interest rates will depress asset prices. And in the era we are in now, average interest rates will be higher than the levels of the past decade.

Michael Wilson, the bearish strategist at Morgan Stanley, believes that US economic growth this year is expected to be weaker than expected, and US stock investors will soon be disappointed.

Wilson said that the market currently expects substantial reacceleration of economic growth, which we think is unlikely this year. September and October data may show signs of weakness, but many stocks and expectations have not yet reflected this.