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According to Doug Peta of BCA Research, stocks will see a sharp correction in the first half of 2025.
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He points to risks from slowing consumer momentum, labor market softening, and high valuations.
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He recommends rotating out of stocks and into defensive plays, and buying the dip after a 30% or greater fall.
Stocks are ripe for a pullback early next year, according to BCA Research.
Strategists at firm said US equities will rally into January before falling over 20% at some point in the first half of the year, meaning investors should get defensive and hedge risk.
The analysts, led by chief US investment strategist Doug Peta, point to a slew of data points that signal a weakening economy as the tailwinds from pandemic-era policies fade.
First, they pointed to a slowdown in consumer momentum after a surge in “revenge spending” following the COVID-19 pandemic.
Now, data shows that the trend may be diminishing, even though households are broadly better off than before the pandemic. Compared to the end of 2019, US consumers have seen a surge in home equity and household wealth amid the stock market’s stellar rally, the analysts said.
Consumer-facing companies have raised warning signs of less spending, with revenues at Home Depot and Lowe’s slumping even amid surging home equity, which formerly signaled a pickup in home improvement spending. Earnings calls from other big retailers like Walmart and Target, meanwhile, have signaled a rise in bargain hunting as consumers tighten their budgets.
“Revenge spending appears to have run its course, and a widening range of retailers report that consumption momentum has faded,” the analysts said in a Monday note.
Second, the BCA analysts pointed to a softening labor market, with October employment data showing the job openings rate climbed from a four-year low from September back above its key 4.5% threshold, while the quits rate rose and the hires rate slipped to revisit a four-year low it set back in June.
That “one-step-forward-two-steps-back” trend preserves the possibility of a soft landing, but remains a sign of softening that could lead to a recession, the analysts said.
“We expect that continued softening will eventually provoke a wave of layoffs, triggering a vicious circle in which shrinking payrolls beget slower spending, begetting further payroll contraction and still slower spending growth until businesses slash discretionary investment and a recession ensues,” the analysts said.
Finally, they highlight heightened risks from historically high stock valuations. The S&P 500 is trading at 23 times above annual earnings, nearly two standard deviations above its mean, while analysts project earnings-per-share growth of 13% in 2025, nearly double the 6.6% postwar average.
