“Are Tech Stocks Discounting a Recession? Market Predictions vs Fed Projections”

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We will not cut rates in 2023. Federal Reserve Governor Jerome Powell has said so several times this year. He is not the only one who thinks so because in the March economic projections prepared by the US central bank, which combines the rate forecasts of all the members of the governing council, a terminal rate for the end of the year averages 5.1%.

The market already “sees” the rate cut

However, the market does not think so. The Nasdaq is already trading now with multiples corresponding to a 300 basis point rate cut. Rate futures predict a “cleaver” of 225-point cuts between now and the end of 2024. A series of macro data arrived on April 27 that seem to prove the market more right than Powell. Because in the first quarter the US GDP grew by 1.1% annualized, much less than the 2.6% of the previous quarter and much less than expected (1.9%). Even the real estate market – often a warning sign of what is brewing in the economic cycle – has triggered the alarm.

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In March, the number of compromises for the sale of homes fell by 5.2%, against expectations for +0.5%. Compared to March 2022, the figure is down by 23.2%. Fewer homes are being sold as banks are raising lending standards also following liquidity problems triggered last month by the failures of Signature, Silvergate, Silicon Valley Bank which could soon be joined First Republic Bank.

If it really is a recession – the Conference Board expects a contraction in US GDP from the middle of the year – in all likelihood we will see a deterioration in the labor market in the coming months, the latest to fall after PMI and real estate. On this front, the market still demonstrates resilience, albeit within a weakening trend. Also on April 27, the update of the weekly requests for unemployment benefits was published: 230,000, less than the 246,000 of the previous week and less than expected (240,000).

The special watch is still inflation

Inflation also remains under special surveillance after the quarterly data of the pce (personal consumption expenditure) index has once again reared its head on a quarterly basis both in the general version (from 3.7% to 4.2%) and in the “core”, adjusted for the prices of food and energy (from 4.4% to 4.9% against expectations at 4.7%).

The resilience of employment and inflation – which by nature offer data lagging behind the trend of the economic cycle – in all likelihood will not stop the Fed from further tightening in early May, by 25 basis points with a rate that could reach 5 .25%. The point is, however, that the market is already visualizing a future at much lower rates. This is explained by the +20% since the beginning of the year in the Nasdaq technology index. It is, among the large baskets, the best equity performance in the world.

At these levels, US tech stocks are trading at 25 times earnings, a multiple they displayed when Fed rates were below 2%. All in all, those who are buying Nasdaq today are pocketing the option that the Fed is quite quick to cut rates by about 300 basis points. Even if we look at rate futures, we discover a rather aggressive market estimate by the Federal Reserve because the projections see a flat rate of borrowing at 2.9% by the end of 2024, with already three 25 basis point rate cuts between September and December of this year.

In fact, denying the cautious declarations of Powell who, mindful of what happened in the 1970s – when the then president Volcker immediately cut rates at the first signs of disinflation only to then suffer two more inflationary waves – in any case will evaluate the next moves. The market is already delivering its verdict.

For this reason, the meeting on May 2-3 will be very important, where Powell will be called to update the course. At that point the markets could be disappointed or find confirmation in their advance movement perpetrated in this first slice of 2023. However, there is a great unknown that exposes all investors to risk at this moment.

The unknown factor on inflation: technical, soft or hard

If there will be a recession, no one can say whether this will be technical (two quarters and then we start again), light (not too heavy to digest) or hard (with a sharp deterioration in company profits). Nasdaq quotations to date are biased more towards a soft landing scenario (GDP cal but does not go below zero) or technical recession. In the event of a “hard landing”, the current multiples would be revised downwards.

«The values ​​achieved by the equity indices already discount scenarios that are not confirmed by the fundamental data – explains Paolo Nardovino, a financial analyst specialized in Gann techniques -. Even if many of the quarterly reports released by the main companies in recent days have exceeded the expectations of analysts (who continue to remain cautious, ed) the prospects for the next quarters are not as rosy as the market discounts, and the equity risk premium at Wall Street is now at its lowest level in 15 years at around 1.5%.

So investing in the US market in the next few months leads to an expected return that is much less attractive than in previous years. From a cyclical point of view, we can hypothesize a first annual peak to be recorded before the summer and then in the months of July and August the knots that can now be seen on the horizon and that have only been postponed but not resolved could come to a head”.

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