US recession 'imminent', time to book profits, says BofA Securities

Boom, bust or a bit of both: as the jury bides time before ruling on the US ‘recession’, the economy’s vital signs at a perplexing time of high-interest rates, still-punishing inflation, and surprisingly strong economic gains are a study of a growing debate over whether the world’s largest economy is barrelling into a new downturn.

With the US Federal Reserve’s (Fed’s) inflation fighters attempting the risky pursuit of ‘pillow-soft landings’ and its economy sending out mixed signals, if there is indeed a recession, it could spell trouble for domestic equities and corporate earnings growth.

An analysis by Bank of America (BofA) Securities shows that the benchmark National Stock Exchange Nifty has performed well — both ahead of and after a recession. However, it witnessed a sharp downfall when the recession reared its ugly head in 2001 and 2007.

The brokerage says that with markets currently near their peaks, it “leaves room for correction with the onset of a recession in the US”.

It believes that with “US recession imminent”, given the fall of its regional lender First Republic Bank, the country’s debt ceiling risks, and the Fed’s ongoing credit tightening, one should look to book profits.

“Our analysis of the past two recessions (2001 and 2007) suggests the S&P 500 falls 20–40 per cent after the onset of recession. The Nifty50 mimics S&P, although it falls less,” it observes.

At present, the Street is expecting the Nifty earnings to grow 17 per cent in 2023-24 and 16 per cent in 2024-25.

Bofa expects sharp downward revisions to these growth estimates due to headwinds such as global slowdown, delayed rural revival, volatile commodities posing a risk to margin revival, and an imminent US recession.