Recession fears diminish, optimism rises
WSJ survey, recession probability 61→54%
Significantly improved 12-month forward EPS forecasts for S&P 500 companies
Overheated aspects of meme stocks and deficit technology stocks amid optimism
The US economy is recovering from fears of a recession. Slowing inflation, a robust job market and a resilient economic recovery are fueling optimism among pundits about the US economy. However, there are also voices concerned about side effects caused by hasty celebrations.
The Wall Street Journal (WSJ) reported on the 15th (local time) that, as a result of a survey of 69 economists for 6 days from the 7th, the probability that the United States would fall into a recession within the next 12 months was expected to be 54%. This is down from 61% in the previous two surveys. It remains historically high, but on a monthly basis, it is the biggest drop since August 2020. As such, concerns about an economic slowdown have eased.
The projected second-quarter U.S. gross domestic product (GDP) growth rate is 1.5% per year, up 1.3 percentage points (p) from 0.2% in the previous survey. It is still expected to be lower than the 2% GDP growth rate in the first quarter, but optimism is more weighted than before. In particular, in the case of the growth rate forecast for the third quarter of this year, the previous minus (-) 0.3%) turned positive to 0.6%, and the overall GDP growth forecast for this year was also raised to 1%, doubling the previous forecast.
The main reason for this optimism is slowing inflation. In a WSJ survey, 60% of respondents predicted that inflation would continue to slow. There is also an expectation that the United States can go beyond a soft landing and win the war against inflation ‘without stagnation’.
Optimism about corporate performance is also growing. According to Bloomberg Intelligence (BI), the forecast for 12-month forward earnings per share (EPS) growth rate of S&P 500 companies, which was close to -70% at the end of last year, improved significantly to -28% as of the 7th. Bloomberg News analyzed, “Although the net profit of S&P 500 companies is expected to decline for three consecutive quarters, it actually means that earnings growth is improving, excluding the energy sector.”
As the optimism grows, so do the alarm bells. In the US stock market, some stocks are rising sharply due to speculative trading. Bloomberg said, “Amid observations that the U.S. Federal Reserve’s tightening stance has reached its end due to slowing inflation, stock prices soared as speculative trading surged in unprofitable loss-making technology companies, ‘Meme Stocks,’ and new stocks. is moving steeply,” he said. Meme stocks refer to stocks that go viral online and attract individual investors.
In fact, the ‘Renaissance IPO Listed Fund (ETF)’, which contains stocks that have just gone public (IPO), rose by nearly 7% last week alone, and the ‘Solactive Roundhill Meme Stock Index’, which tracks meme stocks, also jumped 8%. Goldman Sachs’ “deficit technology companies index” showed the largest increase since January last week.
Abbie Yoder, US equity strategist at JP Morgan Private Bank (PB), called these stocks’ rally a ‘junk rally’ and pointed out, “As it is driven by psychology, not fundamentals, it is questionable whether it will continue.” “Regardless of whether the U.S. economy enters a recession or makes a soft landing, the reality is that growth is slowing,” he added.