The bull market in U.S. stocks needs a dose of bad economic news to continue pushing higher, according to Marko Papic, chief strategist at the Clocktower Group.
Stocks notched down on Monday, after Friday saw the S&P 500
SPX
and Nasdaq Composite
COMP
rise deeper into record territory. But for the bull-market run to continue, equities need weaker U.S. economic data, Papic said in a Monday client note.
“The simple way to boil down our view is that we remain firmly in the ‘bad news is good news’ camp,” he wrote. “A slowdown is precisely what the doctor ordered.”
Weaker economic data would justify the Federal Reserve’s “pivot” signal from December, which would bring down longer-term borrowing costs and help reduce real interest rates, he said.
Read: Fed has the luxury of making policy without pressure of urgency, Bostic says
Without rate cuts, Papic said that higher borrowing costs, a credit pinch and the declining cash hoard from the pandemic era’s fiscal stimulus should eventually put a dent in consumer spending.
As a counterweight, he pointed to relatively low household debt-to-income ratios from a historical perspective, and a Fed that has a lot of room to lower its policy rate from the current 5.25% to 5.5% range, a 22-year high.
U.S. households still have low debt-to-disposable-income levels from a historical perspective.
Macrobond, Clocktower Group
With that backdrop, he noted that investors should ask: How far can equities really fall in a recession if the Fed has 525 basis points to cut?
While stocks could be due for a tactical pullback, Papic said he thinks a greater risk to equities would be a resurgence in bond yields, given the resilient U.S. economy.
The 10-year Treasury yield
BX:TMUBMUSD10Y
was at up 3 basis points on Monday to 4.22%, but remains well below the 5% peak in October that saw stocks slide lower.
As MarketWatch’s Isabel Wang highlighted Monday, the S&P 500’s roughly 21.5% gain since October 2023 looks reminiscent of past surges seen in the dot-com bubble era and in the wake of recessions since World War II.
“Investors can hide out in growth sensitive sectors — like energy — but with tech making up 30% of S&P 500, a downturn in equities is unavoidable if the economy continues to defy gravity,” Papic wrote.
Read: Two more stock indexes are on track for records: What that means for the bull market
—Isabel Wang contributed
