BCA Research identified six key reasons why the U.S. economy may struggle to achieve a soft landing, as outlined in their latest note "Cold Hard Facts: Positioning For An Economic Slowdown."
Here are the six factors they believe could prevent a soft landing:
1. Consumers Are Tapped Out: The firm notes that consumer spending is weakening, which is why BCA recommends underweighting sectors like Consumer Services and Consumer Staples. This indicates that consumers' financial resources are depleting, reducing their ability to drive economic growth.
2. Economic Growth Is Slowing: BCA points to several indicators, such as surveys, capital expenditures, bankruptcies, and the performance of unprofitable small-cap stocks, as evidence of a broad slowdown in economic activity. Consequently, they advise underweighting cyclicals, including Industrials.
3. Disinflationary Trends Return: With disinflationary trends becoming more apparent, BCA suggests underweighting inflation-sensitive sectors such as Energy and Materials. This shift indicates that the inflationary pressures are easing, reducing the need for sectors that benefit from rising prices.
4. Imminent Rate Cuts: According to BCA, rate cuts are on the horizon, which historically benefits sectors like Financials, Utilities, and Real Estate. These sectors tend to outperform in the months leading up to the first rate cut, suggesting a strategic reallocation toward these areas.
5. Downside Protection: BCA observes that the recent market rally has been narrow and multiple technical indicators suggest a potential correction. To safeguard against downside risks, they recommend adding defensive sectors such as Utilities and Pharma to portfolios.
6. GAI Stocks Bubble: BCA warns that GAI (Growth At a Reasonable Price) stocks are in the early stages of a bubble. While they advise taking profits, they caution against completely underweighting these stocks just yet.
BCA concludes that despite better-behaved inflation prints, the broad-based deterioration in economic data and slowdown in consumer spending signal tough times ahead. They suggest taking profits from GAI-related industries and preparing portfolios for defensive positioning ahead of expected rate cuts.