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Why the stock market still hasn’t priced in a full recession

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Yahoo Finance's Alexandra Semenova discusses Wall Street sentiment amid the bear market for stocks.

Video Transcript

[MUSIC PLAYING]

BRIAN CHEUNG: As recession calls continue to grow the question naturally is, have we reached the bottom yet? Yahoo Finance's Alexandra Canal-- oh, Canal, geez-- Semenova. [INAUDIBLE]

ALEXANDRA SEMENOVA: Too many Alexes here at Yahoo Finance.

BRIAN CHEUNG: There are way too many Alexes here. Alexandra Semenova is here to break down the story there. So is the sentiment on Wall Street that, eh, we haven't really gotten there yet?

ALEXANDRA SEMENOVA: Well, Brian, we hear calls on Wall Street every day about a recession. You even hear it at happy hours these days. Anywhere you turn, everyone is talking about the potential for an economic downturn. And obviously, we've seen a lot of volatility in the stock market this year. Stocks are well off of their January 3 highs.

But despite this negative sentiment, the stock market actually isn't pricing the scenario in quite yet. If you take a closer look at the numbers, the S&P 500 is still trading 13% above a widely cited recessionary target of 3,400. This would place the index 29% below its January 3 high. The average recession since World War II has seen the index decline 31%. So we're far away from that despite all the negativity and doom and gloom that we've been hearing about.

BRIAN CHEUNG: Yeah, well, I mean, a lot of investors are probably thinking, oh, my gosh, what is going on here? But of course, the story is also about the Fed. I think we had a tweet that we saw online from one user that was mentioning. This is a fake Jerome Powell, by the way. This is not the real Jerome Powell. But he said, don't think so. I've got a bunch of tools. You ain't seen nothing yet, even though people are concerned that the Fed is going to tilt us into a recession.

ALEXANDRA SEMENOVA: This is my favorite account, as you know.

BRIAN CHEUNG: Yeah, we know.

ALEXANDRA SEMENOVA: It is the best one. I think I send way too many of these on Slack.

BRIAN CHEUNG: And for anyone that knows, obviously, again, that's-- it's a photo of him, but it's not actually him. But I mean, do you think the Fed story folds into that as well?

ALEXANDRA SEMENOVA: Absolutely. I mean, obviously, this is what's worrying investors-- quantitative tightening, higher interest rates, inflation. All of these pressures are very much there. But even with earnings season underway, everyone is preparing for a milder earnings season.

But the S&P 500 is still poised to see aggregate earnings per share of $56. The typical recession sees earnings per share fall by 25%, a decline that would put the figure at about $42 per share a quarter. So, everything is pointing to the fact that the stock market isn't pricing this in yet.

BRIAN CHEUNG: Hmm. All right, a little bit of warning there. Yahoo Finance's Alexandra Semenova, thanks so much for stopping by. Appreciate it.

Thank