Investors who think a recession is in the cards this year should brace for a double-digit correction to rattle the stock market, according to Bank of America.
Strategists at the bank said they see the S&P 500 potentially dropping to as low as 5,000 in the event unemployment rises and the economy tips into a downturn. That implies the benchmark index dropping another 12% from levels on Wednesday.
After dropping to 5,000, the bank thinks the index could rebound, ending the year around 5,500.
The index is down more than 3% year-to-date. Fresh tariff concerns on Wednesday sparked a sell-off late in the session as traders reacted to news from the White House that President Donald Trump would announce auto tariffs at 4:00 p.m. ET. The S&P 500 dropped more than 1%, while the tech-heavy Nasdaq Composite fell 2%.
“US labor market is gradually weakening. Eventually it accelerates to the upside and initial thrust tends to dent stocks. The US yield curve is steepening from inversion,” the bank said, pointing to the inversion in the 2-10 Treasury yield curve, a notoriously accurate gauge for a coming recession.
That said, Bank of America’s base case is for stocks to end the year higher. Strategists said they saw the benchmark index trading between 5,885 and 6,175, implying as much as 7% upside from current levels.
A recession is on the radar of more Wall Street forecasters lately. Fears of a downturn have climbed in recent weeks, particularly as markets digest weakening economic data and fret over the impact of tariffs.
The median market-implied recession odds across 20 asset classes and sectors climbed to 33% last week, up from a 0% market-implied probability in November, according to an analysis from David Rosenberg, economist and the president of Rosenberg Research.
Median market implied recession odds
Bloomberg/Rosenberg Research
GDP, meanwhile, is expected to shrink 1.8% this quarter, according to the latest Atlanta Fed GDPNow reading.
“The implication for investors, as GDP estimates get ratcheted lower, is to reduce overall portfolio risk until more clarity emerges on the path ahead. We recommend tactically increasing defensive sector exposure in the equity portfolio, while simultaneously overweighting fixed income relative to stocks,” Rosenberg wrote in a note last week.
