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Prepare for a U.S. recession in the fourth quarter that will hit stock prices, according to HSBC.
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The bank said in its mid-year investment outlook that rising interest rates would likely trigger an economic recession in the second half of 2023.
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“The flow of news over the next six months could be challenging” for markets, the strategists said.
Investors should brace for stock market challenges through the rest of the year with an expected long-term recession finally hitting the U.S. economy in the fourth quarter of 2023, according to HSBC.
The bank said this week in its mid-year investment outlook that it expects interest rate hikes from the Federal Reserve to push growth into negative territory over the next six months, which would likely send stocks tumbling, chipping away at listed company earnings.
“Our central scenario is one of a recessionary environment in western economies and a difficult and unstable outlook for markets,” said a team led by HSBC’s global CIO Xavier Baraton.
This bleak outlook comes after stocks staged an impressive rally in the first half.
The benchmark S&P 500 index has jumped about 14% year-to-date as investors stock up on tech stocks amid renewed investor enthusiasm for artificial intelligence.
But that rally just means stocks need to drop further when bad news about the economy starts to hit the headlines, according to Baraton’s team.
“Markets don’t appear to be pricing in a particularly pessimistic view of the world. Still, news flow over the next six months could be challenging,” they wrote.
“We’re not massive bears, but we think the news on the economy could be tough to digest for a market betting on a ‘soft landing,'” the strategists added, referring to a scenario in which the Fed manages to bring inflation back to its 2. % target level without crushing growth.
HSBC’s current base case scenario is that the economy will slide into recession in the last three months of the year.
Moreover, 2024 will then be a “year of contraction” that will echo the milder recessions of the 1990s, rather than the severe recessions triggered by the 2008 financial crisis and the 2020 COVID-19 pandemic.
And this recession will even take away some of the shine from the AI boom, which has helped stocks like Nvidia, Tesla and Meta Platforms rack up triple-digit returns over the past six months.
“While this year’s AI trading supports our view that exposing portfolios to important megatrends can lead to unique return drivers to enhance returns and provide a means of diversification, valuations look rich,” said HSBC strategists.
Learn more: This recession indicator flashed again when the Fed announced further rate hikes. It hasn’t been wrong for 44 years.
Read the original article on Business Insider