We believe it is premature to raise the prospect of a U.S. recession when the labor market is so tight and inflationary pressures remain elevated on some metrics. Otherwise, there is ample room for the Federal Reserve (Fed) to cut rates.
However, it is indisputable that "American exceptionalism" is moderating.. After all, US economic data has softened in recent weeks and US equity returns have underperformed the rest of the world during the first quarter. Model-based recession probabilities have increased slightly, and while the future direction of recession probabilities remains uncertain, with high macroeconomic uncertainty, a lack of visibility around US policy across multiple dimensions (trade, fiscal, immigration), our baseline scenario does not see a recession in the country this year.
In equities, the recent 10% drop in the SPX, some oversold conditions could offer some short-term technical support. Overall, however, we believe growth fears will continue to weigh, which could result in renewed pressure on stocks, capping bond yields and driving another leg of defensive leadership..
In addition, we remain cautious on the style of growth this year, Mag-7 and US Techand we expect these groups to lag the market, implicitly leading to a broadening of the market and better SPW performance. and outperformance of SPW (Equal Weight) versus SPX.
On the other hand, we believe that ex-US markets could continue to benefit from the ongoing regional rotation during 1Q25, as fears about US growth will eventually put downward pressure on bond yields and the FED. Unlike historical behavior, where the US dollar tended to strengthen during phases of risk aversion, this time the US dollar is weaker. This is not to say that the "ongoing decoupling", with weak US markets and strong ex-US markets, can prevail. Emerging markets and the Eurozone are likely to move together with the US, but may not present higher betas, traditional in market adjustments.
To the question "How far could the U.S. markets correct?", in general, tounctions end once the "laggards" of the market sell-off finally join the fall. of the market sell-off finally join the fall, credit spreads widen and the "leaders" stabilize...... By looking at a basket of stocks more closely tied to Donald Trump's performance, which rose 55% between the election and the inauguration, and which has fallen 25% since thenwe still find no evidence of that and, while credit spreads have widened, there is still room for a reversion to the mean of spreds spreds without recession.
Since 1998, there have been 11 corrections (price declines of more than 10%) in the S&P 500, with an average decline of 14.3% (equivalent to a decline of 14.3% in the S&P 500).with an average fall of 14.3% (equivalent to around about 5.270 in the S&P 500)levels that we do find more attractive to buy.
These levels of drawdown on the S&P 500, would be consistent with spreadscorporate bond spreads HY spreads around 400 bp (historical average without recession).
In fixed income, we continue to like the atractive risk-return ratio in fixed-income debt. Invesment Grade US.We believe fixed income is better positioned for 2025, thanks to the attractive yields offered by high-quality fixed income, with more favorable valuations compared to equities.
With the "exceptionalism" in US equities already waning and now with the prospect of softening in US data, the possibility of further Fed easing is increasingly being priced into the markets, causing the dollar to weaken further at least through 2Q25, the possibility of further Fed easing is increasingly being priced into the markets, meaning that the dollar may continue to weaken at least through 2Q25.
