The problem with being “early” on recession calls (the same goes for forecasting equity selloffs) is that if they don’t pan out within some reasonable timeframe, “early” isn’t the right word.
We all know the old saying about “early” being the same as “wrong,” but we sometimes seem to lose track of the extent to which it can be (and should be) taken quite literally in this context.
I’ve been over this and over it, but it bears repeating: Another recession is always coming at some point. The same goes for stock drawdowns. So, there has to be an expiration date on macro doom forecasts and bearish equity calls, otherwise there’s no point. They either have a shelf life, or they aren’t properly “forecasts.”
I know this better than you do, and “you” means all of you. At one point in my not-always-illustrious career as a human being, my job was to pretend a US recession and/or a deep equity market selloff was imminent. Every day. In perpetuity. The “forecast” was good until canceled. And it was never canceled, which meant I couldn’t be wrong. I was right by default. Recessions do happen eventually, after all. As do selloffs. It’s good work if you can get it. Depending on your definition of “good.”
Currently, the strength of the US economy has forced macro watchers of all shapes and sizes to reassess forecasts, not necessarily because they don’t believe their thesis anymore, but because if you called for a US recession within 12 months in May of 2022, you were wrong. Period. Because it’s July now. And the year is different. If you said 18 months, you’ve still got some runway, but… well, the US economy probably didn’t contract in Q2, so either the recession starts right now or you too were wrong.
This is a cruel, unforgiving parlor game, which is why nobody should play it, but it pays well, so plenty of people do. Almost invariably, the tide turns just when you decide to throw in the towel. I discussed this Wednesday in the context of S&P 500 year-end targets.
“The pressures on economists to avoid being early (aka wrong) with a recession call are intense, especially on the sell-side,” SocGen’s Albert Edwards wrote, in his latest, before spelling it out in no uncertain terms. “One thing is clear: Economists, having apparently got their recession call wrong, always give up on it just at the point when it arrives.”
We may be at that point right now. Certainly, you can make the case that the market is trading as though a recession has been averted, at least for the foreseeable future.
The figure above speaks for itself. Cyclical outperformance is now completely detached from the grim “reality” of eight consecutive contraction-territory ISM manufacturing prints.
Albert also flagged a recent improvement in analyst sentiment. On a six-month rolling basis, the share of upgrades is rising. That’s likely helping to bolster the mood among investors looking for an excuse to buy into a rally that’s already seen US shares re-rate meaningfully despite the Fed’s pretensions to an even higher terminal rate.
Edwards noted that typically, upgrades do presage better profit outcomes. “No wonder equities are rallying,” he wrote. However, the monthly series shows analyst optimism fading into reporting season, but Edwards suggested that might be gamesmanship ahead of earnings.
He went on to address the robotic elephant in the room. Relative tech performance is disconnected from relative profits, as illustrated rather poignantly in the figure on the left below.
On the right you can see forward earnings diverging from trailing EPS.
“The US tech sector has surged on the back of what may prove to be nothing but hope,” Albert said, referencing the A.I. “baby bubble,” on the way to calling earnings “poor in absolute and relative terms.” Assuming you agree with that description, it makes for a stark juxtaposition with tech’s market cap dominance.
Recall that the so-called “Magnificent 7” now command nearly the same share they did when stocks peaked towards the end of 2021. Edwards called the situation “simply nuts.”
The keen among you will also recall that the last time those seven stocks enjoyed this kind of sway over the cap-weighted benchmark, real US yields were negative 115bps. They’re 290bps higher now.
Coming full circle, Albert said that even he has, at one time or another, doubted his own bearish resolve in the face of an economy that refuses to roll over.
Not this time, though. “I’ve seen this show before,” he wrote. “And I’m not wavering now.”
