Weak economic sentiment could be a buy signal, Bank of America says.
The market historically soars when weak sentiment fails to trigger a recession.
BofA expects this to be the case this year.
Investors have braced for a grim 2025 as weak sentiment data has hinted at looming pain, but the stock market could soar by double-digits if a recession ends up being nothing but talk, says Bank of America.
The bank highlighted a growing gap between sentiment contained in “soft data” and what is actually happening in the economy. If lousy feelings about the economy don’t end up morphing into an actual recession, that’s historically been a trigger for a big rally in the stock market.
“In the past 70 years, when the ISM manufacturing & consumer surveys plunged but no recession followed, US stocks gained 17% and US credit 8% over the subsequent twelve months, outrunning long-term averages,” the bank’s Research Investment Committee wrote.
Conditions are ripe for this scenario to transpire now.
The ISM manufacturing PMI contracted for the second consecutive month in April, slipping to 48.7% — a reading that signals a bearish view of the manufacturing sector. Survey respondents cited high tariff uncertainty and an apprehensive business climate.
Sentiment is equally bleak among consumers. The Conference Board’s latest Consumer Confidence Index plunged in April, hitting levels not seen since the pandemic. Meanwhile, the Expectations Survey reached a 2011 low, giving a clear signal that a recession is inbound.
But these soft data points are at odds with hard data reports, which have been strong and include low jobless claims, a stabilizing dollar, tighter credit spreads, and inflation-beating wage growth.
“It’s a record gap between bearish surveys & bullish facts,” the bank said.
For its part, BofA analysts do not see a recession forming, a view that has been shared by more forecasters since the Trump administration reached a temporary tariff truce with China over the weekend. The de-escalation has been pivotal for nervous investors, as the trade war with Beijing has been a core risk fueling recession angst.
After a weak GDP reading in the first quarter — which economists agree was caused by a surge of imports ahead of tariff disruptions — BofA is betting that the second quarter will see a major reversal, marked by 2% GDP growth and weaker final demand.
If a recession is avoided and the 17% year-on-year forecast pans out, this would pull the S&P 500 to nearly 6,900.
BofA highlighted several other reasons to bet on summer upside, including progress on trade negotiations, a policy pivot to tax cuts and dereulgation, and onshoring from emerging markets.
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