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Investing.com -- BCA Research reiterated its bearish view on U.S. equities as it believes the country is likely to enter a recession this year.
However, in a Friday report, Chief Global Strategist Peter Berezin outlined five upside scenarios that could challenge this outlook and push stocks to new highs.
Scenario 1) ‘The stock market disciplines Trump on tariffs:’ While tariffs have risen sharply in the early weeks of his presidency, BCA notes that “investors have been hoping that the stock market will temper Trump’s love of tariffs.”
So far, that has not materialized, with Trump stating he is “not looking at the stock market” and acknowledging a “period of transition” for the economy.
However, BCA strategists suggest that a significant drop in his approval ratings, rather than market pressure alone, could force a shift in trade policy.
“Until Trump’s approval rating nosedives, investors should expect the trade war to continue,” they wrote.
Scenario 2) ‘The bond market does not discipline Trump over tax cuts:’ The strategists highlight the U.S. budget deficit exceeding 6% of GDP despite low unemployment, with interest expenses set to nearly double over the next decade.
If Trump pushes through additional tax cuts—including eliminating taxes on tips and overtime pay—the economic boost could outweigh the negative impact of tariffs. The risk is that bond markets could react negatively, pushing up yields and tightening financial conditions.
“Investors should monitor Treasury term premia to gauge whether risk premia on bonds are rising to dangerous levels. So far, that has not happened,” strategists said.
Scenario 3) ‘European growth rebounds:’ European equities have outperformed this year, partly due to policy developments, including increased infrastructure spending and efforts to reduce reliance on the U.S. However, strategists caution that rising bond yields in France, Italy, Spain, and the UK could tighten financial conditions and threaten debt sustainability.
Scenario 4) ‘Increased oil production lowers energy prices:’ After spiking earlier this year, oil prices have fallen back toward the lower end of their trading range.
OPEC+ plans to raise production in April, marking the first increase since 2022. According to BCA, while increased production could push prices lower, the breakeven cost for shale producers remains a key factor, as further declines could limit U.S. output.
Scenario 5) ‘AI-driven productivity gains exceed expectations:’ The strategists point out artificial intelligence as a major potential upside for markets. The report compares AI’s impact on growth to past industrial revolutions, noting that while AI applications are already evident in the digital space, it remains unclear when they will have a measurable effect on overall productivity.
It also questions whether AI-driven gains will primarily benefit corporations or workers, adding that current AI investments are capital-intensive and rapidly depreciating. The firm argues that AI’s impact on productivity could rival past industrial revolutions, though it remains unclear how quickly these gains will translate into economic growth.
“It may take a while longer for AI to permeate the economy in a way that has major macro implications,” the report states, adding that the benefits may not be as concentrated in corporate profits as some investors expect.
Despite these potential tailwinds, BCA’s MacroQuant model remains bearish on stocks, estimating that the S&P 500 is trading 41% above its fair value.
For now, the firm continues to recommend an underweight position in equities while favoring cash and defensive sectors.