After entering bear market territory in 2022, the S&P 500 has gained over 8% year-to-date. Despite the recent uptick in share prices, the outlook for equities does not look too promising in the near term.
In fact, a recession could be just around the corner, according to Chris Watling, the chief executive of financial advisory firm Longview Economics. He warns investors that they may need to brace for some turbulence in the stock market.
Speaking on CNBC's "Squawk Box Europe" recently, Watling claimed that a recession is on the horizon, pointing to what he described as "pretty compelling" and "brutally bad" leading economic indicators.
The Conference Board revealed that its Leading Economic Index for the U.S. slipped by 1.2% in March, reaching its lowest level since November 2020. This data suggests that economic weakness may soon intensify and permeate the entire U.S. economy.
Watling also noted that the typical timeline for a recession following the inversion of the Treasury yield curve, which first occurred in March 2022 and then again in subsequent months, is about a year or so. "Every time you've had that in the U.S., you've had a recession. So, I think it's coming, it's on its way. It's just a timing issue," Watling remarked.
Big tech earnings will drive near-term sentiment
Earnings season is in full swing, and we're about to hear from some of the world's corporate giants this week! Big tech firms like Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), Google's Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL), Microsoft (NASDAQ: MSFT), and Meta Platforms (NASDAQ: META) will be stepping up to the plate, alongside other heavyweights such as Coca-Cola Company (NYSE: KO), McDonald's (NYSE: MCD) and Visa (NYSE: V). Talk about a star-studded lineup!
In Q1, just under 20% of S&P 500 companies have shared their earnings, with 76% of them reporting EPS above estimates. This is pretty much in line with the trailing five-year average of 77%, according to FactSet.
However, not all is rosy in the land of tech. The information technology sector is among six sectors predicted to post a year-over-year decline in earnings. Alphabet is bracing for a potential 16% drop in net income for the first quarter as revenue from cloud services grows at its slowest pace since 2016.
This cloud growth slowdown could cast a shadow over Microsoft as well, which is anticipated to report earnings that are unchanged from a year ago.
Q1 GDP and inflation under the radar
This Thursday, the Bureau of Economic Analysis (BEA) will publish its gross domestic product or GDP estimates for Q1 of 2023. It's predicted that the U.S. economy experienced a seasonally-adjusted annual growth rate of 2% in Q1, a slowdown from the 2.6% seen in Q4 of 2022.
The Conference Board expects full-year GDP growth of a mere 0.7% this year, a dip from the 2.1% in 2022, as the U.S. economy continues to grapple with relentless inflation and the Fed's hawkish monetary policy.
Speaking of the Fed, Friday is all about the release of the latest Personal Consumption Expenditures (PCE) Price Index - their go-to inflation barometer. It's anticipated that prices climbed 0.3% last month, equal to February's pace, and soared 4.5% YoY. If true, this would be the slowest annual gain since summer 2021.
Core prices, which exclude those pesky food and energy costs, likely experienced a similar 0.3% increase from February and a 4.5% jump over a 12-month period.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
