This isn't your mom and dad's recession: BofA's Savita Subramanian

The market could go as high as 4,600, which would be a pretty great year, says Savita Subramanian

Things are different this time around. But when it comes to the US recession so many are anticipating in 2023, things really might be. That’s according to Savita Subramanian, head of US equity and quantitative strategy at Bank of America, who spoke with Bloomberg to discuss why the contours of any downturn this year might not resemble those of the past, and what it might mean for the stock market in 2023.

What is your S&P 500 year-end price target and what other scenarios that could play out?

We think the market will close around 4,000, the S&P 500, which is really limited upside from here. But we think there’s a lot of moves within the year. So, let’s talk about a range: our bull case, if everything goes right, we think the market could go as high as 4,600, which would be a pretty great year. And then our bear case and what we think is a reasonable floor for the market is 3,000, which would be quite a big drop from here. So, our views are in 2023, it might be a less-than-stellar year for the market index, but we think there are going to be a lot of great opportunities within the S&P 500, and that’s where we’re really focused with our views — is what sectors, what themes, what areas within the S&P 500 can actually do pretty well this year amid a backdrop of relatively muted returns for the overall market.

And you say this is not your mom and dad’s recession — so how would you characterise it?

When we think about our parents and prior generations, recessions looked really different. Obviously, the depression was one of the most acute recessions we’ve ever seen. Even 2008, when you think about the drama that took place within corporate America, within consumers, homeowners, it was really broad-spread, it was driven by this massive credit cycle. And the good news is that today, corporates and consumers actually look pretty well-capitalised — at least for the time being. And maybe that’s just a function of really low interest rates. But what corporates learned in 2008 was that leverage is evil, and they have now locked in relatively long-dated fixed-rate obligations on the debt side. To me, the most encouraging number is if you compare today’s average maturity of debt on S&P balance sheets to that in 2008. Today, debt terms out at about, on average, 11 years. Back in ‘08, it was more like seven years. So, we’ve seen this longer-duration exposure to fixed-rate debt, which is good news because that means that higher interest rates won’t hurt these firms overnight and they have time to navigate that process. Consumers got a big bolus of cash from the government in 2020, 2021. So, balance sheets of consumers and corporates look pretty great. The government is holding the bag when it comes to debt. So, if you look at deficits,and at Fed balance sheets, what’s different today is that the Fed has never had this type of an asset base. Trillions of dollars of bond purchases have occured over the last 10-plus years, which have been great for risk assets, but how does the Fed navigate unwinding all of that debt? The $1 trillion-question is because we’ve never seen this movie before and that’s what we’re a little more worried about — the public sector than the private sector in this recession.

Everyone assumes earnings estimates from the analysts at present are wrong. What do you think explains that?

Analysts are in wait-and-see mode and maybe even companies too because the real positive surprise over the last few years is that despite rampant inflation, cost pressure, wage pressure, everything going up to pretty high levels in terms of margin pressure, companies have managed to navigate this by either pricing products more aggressively or by cutting costs. Tech companies are reducing their compensation cost structure by layoffs — not great for the economy, but good for their bottom line.   So, analysts and corporates are probably a little less convicted in terms of margins, cost pressure, and pricing power going forward.