What impact will a ‘soft-landing’ have on current stock valuations And does there need to be a recession to experience a meaningful (e.g. 12%+) decline? My short answer is no. The gist of this post is to remind investors that you don’t need a definitive line-of-sight to a potential recession before protecting gains. I say that because recessions are lagging events – which come at the very end of the cycle. By the time they arrive – the economic damage is already done. Therefore, we need to be in front of the curve. Typically in the 9-months leading up to a recession – stocks continue to trade at or near highs – as analysts raise their outlooks. Unemployment and earnings are usually strong – as GDP keeps its head above zero. But those who are able to understand where we are in the business cycle will pay careful attention to what’s happening shortly after peak economic growth.
Earnings
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‘AI’ Trumps the Fed, Inflation and the Economy
The Artificial Intelligence (AI) narrative continues to dominate sentiment. Whether it was Google, Meta or Microsoft… the (AI) earnings script was similar. Mega-cap tech companies so far have reported impressive earnings and revenue growth with respect to their AI strategies (across online ads, cloud and search). It was music to investor’s ears. However, strength in tech earnings isn’t necessary conflating to strength elsewhere. To that end, there is a strong bifurcation with earnings… and that raises some questions.
Things Looking Better – But More to Do
For 23 straight weeks (from late October) – the market has effectively gone straight up. It added ~$12T in market cap with barely a pause – a rally for the ages. Now for ten of those weeks, it was in overbought territory – where the (weekly) Relative Strength Index (RSI) traded above 70. I cautioned readers of a likely (technical) correction. And whilst I stressed the market can remain overbought for several weeks (and it did) – it’s also an area to be cautious. This is where sell-offs start. And it seems we could be seeing the start of a 7-10% correction… however it’s still early.