Investing.com -- BCA Research is warning that equity markets are not adequately pricing in the risk of a U.S. recession, even a mild one, flagging more downside potential for stocks.
Despite a recent pullback in tariff policy by President Trump, the investment research firm maintains a 75% probability that the U.S. economy will contract this year.
“Stocks are not priced for even a mild recession, which suggests that the risk to equities is to the downside,” Peter Berezin, Chief Global Strategist at BCA, said in a note.
The S&P 500 forward price-to-earnings (P/E) ratio stands at 19.9, which is significantly above the levels seen in even mild recessions. Forward 12-month earnings projections remain flat, even though history shows that earnings estimates often fall around 20% during downturns.
Adding to concerns, high-yield spreads remain relatively tight despite rising default rates, signaling complacency in credit markets.
BCA’s cautiousness is also partly driven by weakening U.S. economic data. Business sentiment in the country has deteriorated due to persistent tariff uncertainty, with capital expenditure plans being postponed.
Moreover, first-quarter GDP estimates have dropped sharply, with some models forecasting contraction. “Tariff front-running could be replaced by tariff front-waiting,” the note emphasizes.
While non-U.S. equities have outperformed U.S. stocks year-to-date, Berezin expects this trend to stall in the near term.
The firm notes that non-U.S. stocks are generally more cyclical and therefore more vulnerable in a global recession.
Longer term, however, the fading of U.S. economic and equity outperformance—what BCA calls “the end of U.S. exceptionalism”—could support non-U.S. assets.
Looking beyond the immediate recession risk, BCA’s team argues that the structural drivers behind U.S. stock market dominance, such as monopoly power in tech, are beginning to erode.
In their view, the slowdown in tech earnings growth and a weakening dollar will weigh on U.S. equities in the years ahead.