The S&P 500 is expected to drop to 3750 by 2025, according to a research note from analysts at BCA Research on Friday.
They state that the global equities market has faced a "one-two punch," starting with growing skepticism over the bullish narrative surrounding artificial intelligence (AI), followed by rising concerns about global economic growth, particularly in Europe and China.
These concerns have now spread to the United States, fueled by a surprising increase in the unemployment rate, BCA Research said.
They believe the weaker growth data has led investors to anticipate earlier central bank rate cuts. However, they add that this expectation initially destabilized financial markets, particularly by triggering an unwinding of the yen carry trade.
The collapse of the yen carry trade, along with the reversal of other "low vol" strategies popular among hedge funds, such as the "dispersion trade," has contributed to market volatility, BCA Research explained.
While the market might stabilize in the short term, BCA Research anticipates that the medium-term direction will be downward.
They project that the U.S. will enter a recession in late 2024 or early 2025. Although future Fed rate cuts may eventually stimulate growth, BCA Research cautions that these benefits could arrive too late, as has happened in previous cycles when recessions followed shortly after the Fed began cutting rates.
"While stocks should stabilize in the near term, the medium-term direction is to the downside," writes BCA. "We continue to expect the US to enter a recession in late-2024 or early-2025."
"We expect the S&P 500 to drop to 3750 in 2025 and the 10-year Treasury yield to fall to 3%," BCA adds. The events of the past few weeks, they warn, are a preview of what is to come for investors.