A recession is coming — and stock markets won’t come through it unscathed, strategist says

A recession is coming — and equity markets won’t come through it unscathed, strategist says

The latest U.S. economic data suggests a recession is coming, according to the chief executive of financial advisory firm Longview Economics, and investors may need to prepare for some pain in the stock market.

Speaking to CNBC’s “Squawk Box Europe” on Friday, Chris Watling said he believed a recession was on its way, citing what he described as “pretty compelling” and “brutally bad” leading economic indicators.

The Conference Board on Thursday said its Leading Economic Index for the U.S. fell by 1.2% in March, slipping to its lowest level since November 2020. The data appeared to indicate that economic weakness could soon intensify and spread throughout the U.S. economy.

Alongside this warning signal, Watling said the typical timeline for a recession after the inversion of the Treasury yield curve, which first inverted in March 2022, then again in the following months, was roughly one 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 said.

While many economists have warned of a looming recession, the International Monetary Fund suggested only last week that it had been surprised by the recent strength of the U.S. labor market and consumer spending.

The IMF on April 11 released its latest World Economic Outlook report, in which it said it sees the world’s largest economy expanding by 1.6% this year, up from the 1% forecast in 2022.

Gita Gopinath, the IMF’s first deputy managing director, told CNBC’s Joumanna Bercetche last week that signs of cooling inflation data had given the fund reason to believe the U.S. economy could avoid a recession. However, a so-called hard landing was still “within the realm of possibilities,” she added.

Earnings expectations ‘way too optimistic’

Asked on Friday whether equity markets could come through an expected economic downturn relatively unscathed, Watling replied: “I mean they won’t come through it unscathed in our opinion. I’m not even sure about relatively.”

“The reality is if you look at profit margins, they went to record highs in 2021 and a bit of 2022, and of course when you have a lot of inflation around, you can get very good operating leverage so you can get record high profit margins,” Watling said.

“When you get into recession, we’ve got to do a double hit on profit margins. You’ve got to normalize them back to normal levels and then you’ve got to price in a recession. So, I think the expectations for earnings are way too optimistic and therefore the stock market will have to contend with that at some point.”

— CNBC’s Karen Gilchrist contributed to this report.