The consensus narrative that the US economy is headed for a soft landing is wrong, strategists at BCA Research said in a Wednesday note.
“The US will fall into a recession in late 2024 or early 2025,” they wrote, citing data from their kinked Phillips curve framework.
According to BCA, the framework suggests a nonlinear relationship between inflation and unemployment. When unemployment is high, firms can hire workers without significantly increasing wages.
However, once full employment is reached, companies can only grow their workforce by attracting employees from other firms, which triggers a cycle of rising wages and prices. This wage-price spiral can only be halted by reducing aggregate demand, typically through tighter monetary policy.
“The reason the US avoided a recession in 2022 and 2023 was because the economy was operating along the steep side of the Phillips curve,” strategists wrote.
“When the labor supply curve is nearly vertical, weaker labor demand will mainly lead to lower wage growth and falling job openings. In other words, an immaculate disinflation,” they added.
In line with its views, BCA is now tactically underweight on equities, after turning bullish last year and neutral earlier in 2024.
As a result, strategists expect the S&P 500 stock market index to drop to 3,750 during the next recession.
“Such a drop would bring the index back to where it should be based on our estimate of the net present value of future earnings,” strategists wrote.