A recessionary tale: caution is advised and not conviction that a soft landing lies ahead

Philip Short

The markets entered the fourth quarter with renewed optimism, rewriting the higher-for-longer interest rate narrative and buoyed by a positive earnings season in the US.

But, we remain wary of becoming overoptimistic, and believe the question we need to interrogate as we finish out the final months of the year is: “How likely is it that the world economy will experience a soft landing, and what would that mean for equity markets?”

Optimism on the outlook for companies with AI capabilities set the stage earlier in the year, with Nvidia putting out a brilliant, market-beating set of results that laid the foundation for this optimism. That led to certain heavy-weight companies rallying, pulling the rest of the market with them, and strong third-quarter results from Amazon and Meta kept the momentum going.

At the same time, we saw the US post decent real GDP data in July and August, both above 2%, and inflation continued coming down. Consumer spending was positive, but only just. Market analysts have increased their earnings forecasts for US companies. Ergo, the calls for a soft landing or no recession grew louder. This should not, in itself, be a source of comfort, as the voices predicting soft landings were loudest right before the actual recessions in 2001 and 2008.

Click here to read more...