AI-driven stock rally in H2 loses luster in recession: HSBC

• Get ready for a fourth-quarter US recession that will hit stocks, according to HSBC.
• In its mid-year investment outlook, the bank said higher interest rates were likely to trigger an economic slowdown in the second half of 2023.
• “The news stream over the next six months could prove challenging for the market,” strategists said.

The long-anticipated recession is likely to finally hit the U.S. economy in the fourth quarter of 2023, according to HSBC, and investors should prepare for stock market pain for the rest of the year.

The bank said in its mid-year investment outlook this week that the Federal Reserve’s interest rate hikes will drag growth into negative territory over the next six months, ripping earnings at listed companies and pushing stock prices higher. He said he expected to be hit.

“Our central scenario is a recessionary environment in the western economies and a challenging and volatile market outlook,” said the team led by HSBC Global CIO Xavier Balaton.

The bleak outlook comes after the share price showed a remarkable rally in the first half of the year.

The benchmark S&P 500 index is up about 14% year-to-date as investors hoard tech stocks as investor enthusiasm for artificial intelligence grows.

But Balaton’s team said the rise only means stocks could fall further as bad news about the economy begins to dominate headlines.

“The market does not appear to be pricing in a particularly pessimistic worldview. Nevertheless, the news stream over the next six months could be tough,” they wrote.

“While we are not massive bears, we believe economic news may be hard to digest for markets pricing in a ‘soft landing,’” the strategists added, adding that the Fed managed to bring inflation down to 2. He mentioned a scenario of a drop to the dollar. Achieve the target level % without hindering growth.

HSBC’s current baseline scenario is that the economy slips into recession in the last three months of the year.

Moreover, 2024 will be a “year of contraction” that reflects the milder recession of the 1990s, rather than the deep recession caused by the 2008 financial crisis and the 2020 COVID-19 pandemic.

And the recession will also take away some of the luster from the AI ​​boom that has seen stocks like Nvidia, Tesla and Metaplatform post triple-digit profits over the past six months.

HSBC strategists said: “We believe AI trading this year could create unique return drivers that could enhance returns and provide avenues for diversification by exposing portfolios to important megatrends. We back it up, but the valuations look solid.”

read more: The recession indicator flashed again as the Fed signaled further rate hikes. For 44 years it’s been right.