US Recession Fears Ease As Consumers Show Resilience: UBS

Fears of a looming US recession are receding as recent economic data points to a more resilient consumer and cooling inflation, according to a note published by UBS on August 16. 

The bank highlights the recent rally in US stock markets, with the S&P 500 surging almost 7% since its recent low on August 5. This surge follows encouraging economic indicators, including a better-than-expected 1% jump in July retail sales – the most significant increase since January. Additionally, a decline in jobless claims for a second consecutive week has eased concerns about a rapid cool-down in the labor market.

"Data released over the past week has struck the right balance, being not too hot, nor too cold. This should help ease both concerns of a looming recession or that sticky inflation will hamper the Federal Reserve if swift rate cuts are needed to defend growth," states UBS.

The bank further notes the positive impact of easing inflation, with the consumer price index slowing to 2.9% year-on-year in July. This trend, coupled with resilient consumer spending and a potential easing in the pace of interest rate hikes, has boosted investor confidence.

This positive earnings picture is further supported by FactSet data: among the 93% of the S&P 500 companies who have reported earnings to date for the second quarter, 79% have reported actual EPS above the mean EPS estimate.

FactSet data also shows that the actual number of S&P 500 companies mentioning "recession" during their second-quarter earnings calls has remained relatively low. Only 28 companies mentioned the term, significantly below the five-year average of 83.

However, UBS cautions that risks remain, and investors will be closely watching the upcoming August employment report for a clearer picture of the labor market's health.

Despite these lingering concerns, the bank remains optimistic about the US economy achieving a "soft landing" and anticipates the Federal Reserve beginning to ease monetary policy in its September meeting.

"Our base case remains for an economic soft landing in the US, with the Federal Reserve starting to ease policy at its September meeting. We also see a strong outlook for corporate earnings," says UBS.