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Reporter of China Business Network: Cai Ding Editor of China Business Network: Lan Suying

The global financial market experienced a thrilling "Black Monday" this week. On August 5 (Monday), the sudden and huge fluctuations in the Japanese market were like the flapping of a butterfly's wings, which set off a storm in other stock markets around the world. Major stock indexes, led by the Nasdaq index, fell sharply on Monday.

A reporter from the Daily Economic News noticed that behind this stock market turmoil, in addition to the Bank of Japan's unexpected interest rate hike last week, which led to a large-scale liquidation of "yen carry trades", there is also a deeper concern, namely the market's concerns about a US economic recession, which has also triggered market speculation about when US stocks will bottom out.

Judging from historical data, even after the recent adjustment, the valuation of the S&P 500 index is still at a historical high. In an interview with reporters, Huang Senwei, a senior market strategist at AllianceBernstein, also said that based on past experience, the US stock market is relatively prone to volatility in the third quarter, and the volatility of the US stock market will increase as the US election approaches.JPMorgan ChaseAnalyst Thomas Salopek bluntly stated that the market currently does not have a complete series of "bottoming signals" and the depth of subsequent corrections may further deepen.

Several investment banks raised their forecasts for a U.S. recession and the Fed's rate cuts

The market's concerns about the US economy falling into recession came from the non-farm data released by the US Bureau of Labor Statistics on August 2. The data at the time showed that the United States created 114,000 jobs in July, far below the expected 175,000, and the unemployment rate also rose to 4.3%, a nearly three-year high, which triggered a recession leading indicator known as the "Sahm ​​Rule."

According to the law, if the three-month average unemployment rate is half a percentage point higher than the lowest level in the past 12 months, the United States will be in the early stages of a recession. According to this measurement, the U.S. unemployment rate rose in July, causing the three-month average unemployment rate to rise to 4.1%, while the lowest level last year was 3.5%, which is 0.6 percentage points higher, meeting the conditions of the early stage of a recession in "Sahm's Law". The law is named after American economist Claudia Sahm.

In addition to employment factors, the US ISM manufacturing PMI in July was 46.8, significantly below the boom-bust line of 50 and the expected 48.8. The previous value in June was 48.5, and the contraction was the largest in eight months.

After the intensive disclosure of weak economic data, several major Wall Street investment banks have raised their bets on the probability of a US recession.

JPMorgan Chase believes that the probability of the US economy falling into recession by the end of this year is 35%, higher than 25% at the beginning of last month. The team led by Bruce Kasman, the bank's chief economist, maintained the probability of the US economy falling into recession in the second half of 2025 at 45%. In a research report to clients last Sunday, Goldman Sachs also raised the probability of a US recession next year from 15% to 25%.

but,Goldman SachsWhile raising the probability of recession, economists also stressed that the U.S. economy is still performing "well," with no major financial imbalances, and the Federal Reserve has plenty of room to cut interest rates and can act quickly when needed. The bank's chief economist, Hartz, pointed out, "We still believe that the risk of a recession is limited."

While raising the probability of recession, major investment banks have also increased their bets on the Federal Reserve's interest rate cuts.Citigroup、Wells FargoThe teams at JP Morgan and Bank of America expect the Fed to cut interest rates by 50 basis points in September and November, and by 25 basis points each time starting from the December meeting. According to them, this means that the Fed needs to cut interest rates by a total of 125 basis points (50+50+25) this year.

The reporter of Daily Economic News noted that as of press time, "50+50+25" is not the most mainstream forecast in the market. According to the CME Group's "Fed Watch" tool, traders currently believe that "50+25+25" is the most likely path for the Fed to cut interest rates this year, that is, a cumulative rate cut of 100 basis points this year.

Buy the bottom of US stocks? Wall Street warns: Now is not the time

JPMorgan analyst Lakos-Bujas said on August 8 that the recent sharp drop in the U.S. stock market has washed away some bubbles in the market, but if the U.S. economic growth continues to slow down and the Federal Reserve has not shown an urgency to relax monetary policy, then the related holdings and valuations of U.S. stocks will still face risks.

If a U.S. recession eventually materializes, the current correction may not be enough. According to statistics from Truist Advisors, the S&P 500 has fallen an average of 29% during recessions since World War II.

The reporter of Daily Economic News noted that from a historical perspective, the valuation of US stocks is still high. According to data from the London Stock Exchange (LSEG), the 12-month expected price-to-earnings ratio of the S&P 500 index was 20.8 times last week, slightly lower than the high point in mid-July (21.7 times), but still much higher than the historical average of 15.7 times.

On August 5, JPMorgan analyst Thomas Salopek released a research report reviewing the history of market bottoming out. He said that the market currently does not have a complete series of "bottoming signals" and the depth of the next correction may deepen further.

As of that day, Salopek believes that the current market has not yet shown complete bottom characteristics. For example, the S&P 500 index has not fallen below the 20-day moving average, the market breadth is not at an extreme low, and the put/call ratio has not risen to an absolute high. Salopek also pointed out that there are currently three indicators that show that the market is falling: deteriorating credit spreads, a steepening U.S. Treasury yield curve, and defensive sectors leading the rise.

In addition, judging from past performance, "the third quarter is also a season when U.S. stocks are relatively prone to volatility," said Huang Senwei, senior market strategist at AllianceBernstein, in response to a request for comment from a reporter from the National Business Daily. "Take the S&P 500 index as an example. There was a retracement of about 10% from late July to late October 2023, a retracement of about 19% from mid-August to mid-October 2022, a decline of about 5% from early September to early October 2021, and a decline of about 10% from early September to the end of September 2020."

"This year is also the year of the US presidential election. Past experience shows that US stock market volatility may intensify as election day approaches. Since 1928, in every presidential election year, the VIX index, which measures the market's expectations of future volatility of US stocks, has begun to rise in the second half of the year until the election is held in November," added Huang Senwei.