Stocks are facing rough times between now and the first part of 2023, as Federal Reserve rate hikes and weakening consumer spending squeeze corporate profits, according to Erin Browne, portfolio manager for multi-asset strategies at Pimco.
Markets will likely hit bottom “sometime in the first half of next year,” Browne said in a Zoom video interview on Wednesday. Inflation and a recession will cut into consumer demand in the third and fourth quarters, she said.
Because of this, she said current earnings estimates are “mispriced” since they’re not fully incorporating the impacts of belt-tightening and economic damage stemming from Fed tightening. Contrast this with the falling number of inflation and supply chains problems cited in second-quarter earnings calls, according to Bloomberg Intelligence.
Browne said the S&P 500 could sink to levels between 3,500 to 3,750, but added that a more severe recession could cause the index to plunge as low as 3,000.
Historically, earnings fall by 15% to 20% when the US enters a recession, according to Pimco data. The investment management firm’s models show US corporate earnings turning negative on a year-on-year basis in the fourth quarter.
Higher prices will eat into Americans’ spending even as the Federal Reserve and other central banks will have to “tighten into a weakening demand environment.”
Echoing comments by Morgan Stanley’s Mike Wilson on Wednesday, Browne said that current corporate earnings guidance is behind the curve.
“They’re talking about what they’re seeing now, as opposed to really having great visibility into the next six to 12 months,” she said.
With pain lying ahead, Browne favors being long on higher-quality sectors, such as health care, calling it “a bright spot” in a more a recessionary environment. And Pimco expects that early cyclical stocks like industrials, mining, shipping and transportation will underperform amid weaker demand.
This article was provided by Bloomberg News.