The stock market’s powerful rally is unfounded, and the US economy is virtually guaranteed to sink into recession, David Rosenberg has warned.
The S&P 500 officially entered a bull market on Thursday, as it notched a 20% gain from its October lows. Meanwhile, unemployment data released the same day showed initial jobless claims rose to 261,000 last week, the highest level since October 2021.
“This market continues to be nothing more than a short-term momentum play,” the veteran economist and Rosenberg Research president said in a morning note.
Rosenberg underscored the disconnect between the stock-market milestone and softening labor market. He questioned whether current equity valuations are justified given the darkening economic backdrop.
“You can believe the press headlines or you can believe the leading indicators — which suggest that we do indeed have a 99.15% chance of an official NBER-defined recession,” he said. “And if that is the case, then it is the first time in recorded history that a fundamental bear market ended before the downturn even arrived.”
Rosenberg suggested that aggressive federal spending last year may have pushed back the recession. He described the fiscal support as “the Energizer Bunny gift that just kept on giving.”
Moreover, the former chief North American economist at Merrill Lynch underlined the immense optimism priced into stocks. He noted the S&P 500’s forward price-to-earnings multiple is 25% above its long-term average, and the index is heavily concentrated, as it was during the dot-com bubble.
He also pointed to low volatility expectations as evidence of deep complacency among investors, and cautioned that sentiment is “quickly hitting uber-bullish levels as FOMO stages a resurrection.”
Rosenberg has been sounding the alarm for several months. In late April, he predicted a recession by September, a 20% plunge in the S&P 500, and a credit crunch as banking fears strangled lending. He also told Insider in February that house prices could tumble by 15%-20%.
Numerous market commentators have warned that asset prices will fall and the economy will contract. They’ve pointed to the Federal Reserve hiking interest rates from nearly zero to upwards of 5% since last spring, which has encouraged saving and made borrowing far more costly.
Higher rates help to combat inflation, but they’re typically bad news for consumer spending, debt-reliant industries such as commercial real estate, and riskier assets such as stocks.
