Recession Talk Not Supported by Hard Data

An April 2 tariff deadline looms, alongside other market factors, including potential inflation, The Department of Government Efficiency (DOGE) job cuts, the proposed cease fire between Ukraine and Russia, the broken cease fire between Israel and Gaza, the Fed remaining uncommitted to targeted rate cuts, the weaker soft data in the U.S. failing to corroborate healthy hard data and earnings forecasts being more guarded, with the dirty word “stagflation” being thrown around.

It is intriguing that heading into the end of the quarter, the analyst community is still very upbeat on U.S. companies’ sales and earnings prospects despite the financial media’s embracement of the recession narrative. According to the latest research published by FactSet, overall, there are 12,320 ratings on stocks in the S&P 500. Of these ratings, 55.7% are Buy ratings, 38.7% are Hold ratings and 5.6% are Sell ratings. The percentage of Buy ratings is above its five-year (month-end) average of 55.0%. The percentage Hold ratings are below its five-year (month-end) average of 39.1%. The percentage of Sell ratings is also below its five-year (month-end) average of 5.9%.

The most optimistic rating fall into the energy, information technology and communications services sectors that hold the highest percentage of Buy ratings. After falling to 53.6% at the end of October 2024, the percentage of Buy ratings for the S&P 500 has increased over the past five months to 55.7% today. If 55.7% is the final percentage of Buy ratings for the month of March, it will mark the highest (month-end) percentage of Buy ratings for the index since August 2022 (55.8%). Not quite the stuff of a pending recession.

Just to reiterate from a previous column, the amount of goods at risk of being tariffed impacts only about 11% of total U.S. GDP and is probably why the analyst community isn’t as bearish on U.S. business prospects as the talking heads are that work for the media outlets. It is an interesting list of stocks that carry the most buy and sell ratings considering the weak share price action of several of the top-Buy rated stocks. Either the analyst community has it very wrong or the market has it wrong.

Three of the stocks with the highest percentage of Buy ratings happen to be travel and leisure companies. VICI Properties Inc. is an S&P 500 experiential real estate investment trust that owns one of the largest portfolios of market-leading gaming, hospitality and entertainment destinations, including Caesars Palace Las Vegas, MGM Grand and the Venetian Resort Las Vegas. Delta did offer cautious guidance on the company’s future growth rate, but still forecast top and bottom-line growth, just at a slower pace than sky-high demand in 2024.

Is the economy hitting a soft patch? Maybe. The consumer surveys would suggest such is the case. The latest AAII survey is decidedly negative, but experienced slight uptick in the latest week. Bearish sentiment, expectations that stock prices will fall over the next six months, decreased 1.1 percentage points to 58.1%. Bearish sentiment is unusually high and is above its historical average of 31.0% for the 16th time in 18 weeks. This is the first time in the history of the survey that bearish sentiment has exceeded 57% for four consecutive weeks.

For those that follow the AAII survey, it has become one of the more accurate contrarian indicators for knowing when to buy and sell the broad market. When bullish sentiment is above 45%, the market is historically overbought. When the bearishness is above 45% the market is historically oversold. For bearish sentiment to be above 57% for four straight weeks is starkly negative and really telegraphs the level of fear seen in the CBOE Volatility Index (VIX) that peaked at 29.56 on March 11 and now stands at a still elevated 19.26. If past is prologue, then the AAII survey is flashing a strong buy signal.

The common theme among monetary policymakers at the Fed is that of caution, with most voting members adopting a wait-and-see stance toward tariffs and trade policy, which has fostered what Fed Chair Jerome Powell called “unusually elevated” uncertainty. When the Fed is unsure of the situation, markets trade lower, and yet, this past week, there were signs of bargain hunting emerging in beaten down sectors.

It is clear that this correction has been the product of not just uncertainty and a decline in investor confidence but also the deleveraging by institutional and retail investors that came into 2025 locked and loaded for potential big market gains. This great unwind of leverage and related margin calls seems to have run its course over the past month.

Last week, both Citigroup and Morgan Stanley reiterated their year-end targets for the S&P to hit $6,500, representing 15% upside from where the index currently trades. This would imply the AI trade is still very much alive and well since the Magnificent 7 represents 8 (Google A/Google C) of the top 10 holdings in the S&P 500 and 35% of its total weighting. As of this writing, the only Magnificent 7 stock trading above its 200-day moving average is Meta Platforms Inc. (META), and barely so.

There has been broad technical damage exacted among the majority of stocks within the S&P 500 with a lot of wood to chop for the market to reach $6,500 by year-end. Some further use of the “flexible” trade language by President Trump that incited Friday’s upside reversal and positive close would do much to help repair the damage done by all the that has transpired since the S&P hit a new all-time high one month ago. While I’m not holding my breath, there is a sense that leading stocks have appropriately recalibrated valuations to reflect the thick fog bank the market is in. But while every fog bank greatly reduces visibility, they are often localized, covering short areas, like patches along a great highway. For now, investors should keep their fog lights on and drive with a sense of cautious optimism.