BCA Research has issued a bearish outlook for the S&P 500, warning that stock prices are likely to be "meaningfully lower 6-to-12 months from today."
"Investors should maintain an underweight stance toward risky assets," wrote BCA.
The firm states that the prediction comes amid growing concerns about the U.S. economy's ability to avoid a recession as labor demand weakens and inflationary pressures persist.
"The U.S. economy is now at the point where a further decline in labor demand would likely coincide with a surge in unemployment and a recession," they state.
According to BCA Research, despite the Federal Reserve's expected rate cuts starting next month, the market's optimistic "soft-landing narrative" is overly confident.
The analysts argue that "it is still too early for the Fed to declare 'mission accomplished' on inflation," as core inflation remains above target, wage growth exceeds historical norms, and inflation expectations remain high.
BCA Research cautions that while a "stealth tightening" effect will impact U.S. households even as the Fed lowers rates, an outsized cut in September is possible.
However, they do not anticipate more than 220 basis points of easing in the absence of a recession. They also suggest that long-term government bond yields might initially rise before falling again as recessionary dynamics become more apparent.
In light of these factors, BCA says investors should maintain an underweight stance toward risky assets, advising against buying into any short-term rally that may occur due to the bullish rate-cut narrative.
The firm notes that "the U.S. election race has narrowed" but does not see the election as a positive catalyst for the economy or corporate profits, further reinforcing their cautious outlook.
Overall, BCA Research's position is clear: despite the potential for short-term market optimism, they expect that the S&P 500 will face significant downside risk over the next 6 to 12 months.