The drumbeat of recession calls are growing louder — and one key question is whether that outlook has been priced into stocks.
Strategists have increasingly warned that equities could see even more declines, with one saying the S&P 500 (^GSPC) could drop another 15% or so.
"3,200 on the S&P is very attainable," Matt Maley, equity strategist at Miller Tabak, told Yahoo Finance Live (video above). "The thing is, people keep saying that the recession is getting priced into the stock market. I think it’s just barely beginning to be priced in."
Tightening financial conditions have been a key factor adding to bearish investor sentiment.
Last week, Federal Reserve Chair Jerome Powell fielded questions from members of Congress and journalists about the risk of a so-called “hard landing.” And on Wednesday, he reiterated his commitment to rein in inflation in response to accusations that the central bank will push the U.S. economy into recession.
“Is there a risk we would go too far? Certainly there’s a risk,” Powell said at the European Central Bank’s annual economic policy roundtable conference in Portugal. “The bigger mistake to make — let’s put it that way — would be to fail to restore price stability.”
Maley stressed that analysts criticizing the Fed for its reaction to inflation may also be at fault for keeping too-sanguine earnings forecasts. A recent report from FactSet found that analysts have an “unusually high” number of Buy ratings on the stocks they cover.
As of mid-June, the average Wall Street strategist forecast for S&P 500 earnings this year was $227 per share, according to Bloomberg. That puts the forward price-to-earnings ratio for the index at 16.7.
If that consensus — or the actual earnings numbers — starts to fall, the index could look more expensive to investors.
"What happens if those earnings have to come down, which I think is very, very likely?" Maley said. "We’re probably trading at 18 times earnings, which is far from fair value. ... I’m not sure why these analysts haven’t been lowering their numbers."