Bank of America trims S&P 500 forecast as the market prices in a '1 in 3 chance' of a recession and recommends investors get defensive by adding consumer staples

Bank of America trims S&P 500 forecast as the market prices in a '1 in 3 chance' of a recession and recommends investors get defensive by adding consumer staples
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  • Bank of America on Friday reduced its S&P 500 target for this year to 4,500 from 4,600.
  • "Recession math" suggests investors see a one-third chance the US economy will contract, analysts said.

Bank of America recommended investors start playing defense by loading up on consumer staple stocks, as the market prices in a one-third chance the world's largest economy will fall into recession.

"Recession math says 1 in 3 chance priced in" by equity market investors, analysts at the bank said in trimming its S&P 500 target for 2022 to 4,500 from 4,600.

The move comes as the broad equity index has re-entered correction territory after briefly falling 10% last month from its most recent high.

On Friday, the S&P 500 was down 1.7% at 4,215.57, marking a 12% decline from its last closing high in late December.

"Note that the average peak-to-trough decline in the S&P 500 amid recessions has been ~32%," said Savita Subramanian, head of US equity and quantitative strategy at Bank of America Securities, in a research note. "Thus, the S&P's 10% YTD decline can be very roughly interpreted as discounting a one-third chance of a recession (one third of the avg. peak-to-trough decline). If the probability of a recession rises, more downside risk would be expected."


Fears of a recession rose after the Commerce Department said Thursday that US gross domestic product shrank by 1.4% in the first quarter, a contraction that was widely unexpected.

Economists at Bank of America in a separate note Friday said recession risks "are low for now" but are elevated for 2023.

"The key risk is that inflation remains elevated next year, forcing the Fed to hike until it hurts," BofA economist Alexander Lin said.

Investors have been pricing in expectations for an aggressive period of rate hikes by the Federal Reserve as it works to cool down headline inflation that's accelerated to 8.5% in March. The Fed began the hiking cycle in March by raising its ultra-low rates by 0.25%. And now the market is bracing for a half-point rate hike at the Fed's meeting on May 3 and 4.

In seeing recession risks on the horizon, Subramanian said BofA was shifting defensive and double-raising the consumer staples sector to overweight from underweight.


"The sector is near a record underweight by institutional investors, and lessening labor/input cost inflation could benefit margins," she said.

"Better-than-expected consumption (especially in the lower income cohort) despite inflation and a big uptick in spending on services (admittedly at the expense of big ticket spend) are positive," she added, noting observations from a BofA survey of analysts and developments from the first-quarter earnings season.

The S&P 500 Consumer Staples index has risen more than 3% this year, outperforming the broader index.

The S&P 500 during Friday's session was on course to wrap up trading in April by losing about 7% for the month. The Consumer Staples Select Sector SPDR ETF, which has around $17 billion in assets, fell 1.5%, as did the iShares U.S. Consumer Staples ETF . The Vanguard Consumer Staples Index Fund ETF shed 1.4%.