Does the late cycle pose a threat to the stock market?

U.S. stocks have extended their late-2023 rally and some European indexes are now near all-time records, leaving investors asking whether they can continue to profit from the bull market or whether it's time to take a step back.

"The best entry point for the stock market is when the economic recovery potential is abundant, but judging from key cycle indicators, both the economy and financial markets are already in the late cycle stage," Boyaa Bank strategists said in a note on Friday. ".

The U.S. unemployment rate is below 4% (link), a level seen in the past as signaling an imminent recession, global corporate profit margins are above the 20-year average, and U.S. high-yield credit spreads (link) are falling, which is A sign of overall investor confidence.

The Boao Forum for Asia pointed out that these indicators indicate that in a late-cycle environment, economic activity often reaches its peak, so the potential for macroeconomic recovery and room for stock rebounds have been basically exhausted.

The late-cycle phase does not guarantee an imminent correction, but it is "bad for the market" because the next move for unemployment and high-yield spreads "will almost certainly be higher," these strategists said.

Boya Bank added: "Monetary tightening typically leads to weaker growth and higher unemployment, with a lag period of about 18 months, suggesting that the full impact of monetary tightening has not yet been felt and should not be felt until later this year."

The bank remains negative on European equities as U.S. economic growth is expected to weaken later this year and there is not much spare capacity in the context of a late-cycle economy.

Boyaa expects benchmark STOXX 600 by fourth quarterSXXPThere will be about 15% room to fall in the index, which is up more than 6% so far this year, and cyclical stocks will underperform relative to defensive stocks by 15%.

(Mateo Allevi)

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