When it comes to analysts’ predictions on the S&P 500, Peter Berezin from BCA Research offers a strikingly unique perspective. His forecast for the close of the year is 5,300, making it the most conservative projection out of the 30 analysts surveyed by Bloomberg. This estimation is not based on a pessimistic nature but rather is forged from a sober analysis of the incoming data.
Berezin is no stranger to taking unorthodox positions if the data supports it. In 2023, amidst predominant predictions of an upcoming US recession, he offered an optimistic outlook, asserting that there would be no recession and that immaculate disinflation would take the lead. Looking back, he was among the very few who got that call right.
As the US market continues to prove its fortitude, surprising many with its robust resilience, it’s worth examining Berezin’s caution-filled perspective. His interpretation of the current market conditions, particularly the uncertainties surrounding a potential US recession, is worthy of consideration. Is his conservative year-end target for the S&P 500 a harbinger of an impending recession? The short answer is yes.
Berezin’s year-end projection is a weighted combination of two distinct possibilities. The first considers a scenario where the US indeed plunges into a recession this year— an eventuality given a 60 per cent probability. In this situation, the expected per-share earnings (EPS) for the S&P 500 plummets to $250 for the year. This forecast seems realistic if one considers a weak economic trajectory.
Applying an 18-fold multiplier to the $250 prediction leads to a price target of 4,500 in the event of a recession. However, recession, though forming the basis of his perspective, is not a forgone conclusion. There remains a chance that a recession could be skirted altogether.
If the US successfully dodges a recession, Berezin estimates that the S&P 500 could surge towards approximately 6,500, driven by an improved EPS expectation of about 265. Based on a probability weighted average of the two scenarios (60-40 split), we arrive at his year-end target of 5,300.
According to Berezin, a recession later this year is more likely than not. If this prediction comes to pass, the S&P 500 would likely witness a significant drop to around 4,500. By historical standards, the 18 times earnings multiple applied to the S&P 500 during a recessionary scenario seems quite high.
This may raise questions, as it’s common for Price-Earnings (PE) multiples to fall in the teens during mild recessions and even plunge into single digits during severe economic slumps. A closer inspection of Berezin’s methodology, however, reveals his rationale— he anticipates the recession, should it occur, to be relatively mild.
There are several reasons for Berezin’s belief in a non-severe recession. Mainly, he identifies minimal economic imbalance as the lack of heavy company leverage, stable bank balance sheets, and a lesser degree of oversupply in the housing market compared to 2007. The repercussion on earnings, therefore, might be moderate in nature.
The second factor justifying higher PE multiple stands on the thesis that we’re experiencing a surge in artificial intelligence (AI), and better productivity data could be unveiled in the coming years. A materialization of such a scenario would naturally justify a higher PE multiple for the equity market.
Economic perspective, however, would not be complete without an examination of tail risks. One substantial risk stems from geopolitical uncertainties, particularly in the White House. It’s plausible that a failure in negotiations between the EU and Trump administration could pose a serious threat to the markets.
The aftermath of such a scenario could be a chain reaction of retaliatory actions, potentially leading to a breakdown in transatlantic trade. Not immediately evident, the detrimental impacts of these trade disruptions may only appear in economic data down the line, eventually leading to a deeper recession than initially anticipated.
Worries extend to the bond market too. With a budget deficit nearing 7% of GDP and historically low unemployment rates, the US is in an unprecedented situation. Fears arise from the possibility of bond yields not falling amid a mild recession due to an impossibly large deficit. A subsequent rise in term premiums, even despite Fed rate cuts, could negate any benefits from reduced short-term rates. This scenario, though not highly probable, is a significant risk that is certainly worth consideration.