SocGen 10-Year Outlook: 100% Chance Of Recession; S&P To 4,000 Or... 500

Tyler Durden's picture

No matter what, SocGen sees US equity performance over the next 10 years as modest at best. They note that US equities face three headwinds: cyclically-adjusted valuations (CAPE, starting date 1881) have returned to very expensive territory, corporate margins stand at historically high levels, and after already five years of growth from the 2009 trough, we estimate that the probability of another recession kicking in is close to 100% within the forecast timeframe (the longest cycle ever was 120 months, or 10 years). While their central case is 'moderate growth and inflation', they project a possible high growth surge to 4000 for the S&P 500 and a deflation scenario which would put the S&P 500 at 500 (-12% per annum).

 

Via SocGen,

This is the second edition of our 10-year equity outlook. The first was published in July 2009, when the economic consensus was still weighing up deflation fears and valuations were depressed (read: an excellent entry point.). At the time we set an S&P500 target of 1300 under our central scenario (in mid-June 2009 it was 923).

[ZH: So in 2009 they forecast the S&P to be at 1300 in 2019... and we are now 50% higher than that already!!]

US equities

US equities face three headwinds:

cyclically-adjusted valuations (CAPE, starting date 1881) have returned to very expensive territory,

 

corporate margins stand at historically high levels, and

 

after already five years of growth from the 2009 trough, we estimate that the probability of another recession kicking in is close to 100% within the forecast timeframe (the longest cycle ever was 120 months, or 10 years).

 

A recession costs on average a 22% drop in US earnings

The most recent economic recession triggered by the collapse of Lehman Brothers caused an unprecedented wave of US earnings downgrades and was comparable in effect to the two previous oil shocks, the Gulf war and the Dot-Com bubble burst.

 

But US equities have supports as well, such as impressively strong balance sheets and the beginning of a new M&A cycle, backed by a highly reactive central bank.

Central scenario: moderate economic growth and inflation

Our central scenario projects moderate underlying economic growth of 5% per year over the next few years, i.e. below the long-term growth trend (8.6%). We have also adopted a scenario whereby inflation will gradually increase at a modest rate, until it pushes down the normalised 10-year moving P/E rate slightly, to below its long-term average of 20x. Based on these assumptions, we expect the S&P 500 to rise by +3% p.a. and reach 2500 points in 10 years.

But there are 3 Altnerative Scenarios...

Alternative scenario 1: sharp growth & high inflation +2%/yr

In a high inflation scenario, two opposing forces go head to head: on the one hand, inflation prompts an acceleration in (nominal) reported corporate profits and, on the other, it reduces equity valuations. The combined forces would be likely to have a positive impact on equity markets (+2%). In this scenario, while nominal returns are positive, real returns would be eaten up by inflation.

Alternative scenario 2: sharp growth & moderate inflation +8%/yr

In this scenario, the equilibrium between growth and inflation would be well managed by the central banks and /or the US gas shale revolution would help maintain inflation within a low range. This is a kind of continuation of the trend we have observed over the last couple of years in the US. On this assumption, equity market P/Es would remain high and corporate profits would accelerate rapidly. Our scenario would yield an annualised equity index slope of about 8%, pushing the S&P 500 to 4000 points at the end of the period.

Alternative scenario 3: depression -12%/yr

We have no doubt that a deflation scenario, like that of the 1930s in the US, would considerably damage corporate profits and the equity market valuation, eventually impacting the equity markets themselves. We saw this in Japan between 1995 and 2005, when the collapse in listed Japanese company ROEs severely cut into their equity valuations and thus the Nikkei index. We believe such a scenario would put the S&P 500 at 500 points in 10 years (-12% p.a.).

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maskone909's picture

Were already in a depression

gmrpeabody's picture

Let's see here..., S&P to either 4000 or 500, whichever comes first.

Matches my estimate exactly.

kill switch's picture

Ten year outlook????? HAHAHAHA We won't be here in ten fucking years you morons,,,the political systems as we know it will have collapsed,,,,Joseph Tainters collapse of complex societies.....!! And that was fucking Rome without computers....Good luck world.

 

DeadFred's picture

S&P down to 500 takes the first two weeks of the downturn but do they say what happens then?

Redneck Hippy's picture

When is a forecast not a forecast at all?

disabledvet's picture

When you get hit by a five billion dollar fine? Or was that the other French Bank?

"When things get serious you have to sue."

OldPhart's picture

[ZH: So in 2009 they forecast the S&P to be at 1300 in 2019... and we are now 50% higher than that already!!]

Well, yeah, but who knew at that time that the Fed, along with the rest of the world's central banks, would go full, batshit crazy?  I didn't, I expected a full crash by 2010.

Yet here we are...propped up with lies and, in Europe's case, negative interest rates.

They went full retard...no one should ever go full retard.

SyndicateOne's picture

Nothing matters other than the stock market going up. THAT'S IT! That is unless...it goes down. Then what do we all do?

Its Only Rock N Roll's picture

Seriously...why even waste the effort on writing that drivel?  Who the hell reads it and trades on it? 

My forecast for the age of my death is somewhere between 43 and 120. 

OldPhart's picture

Mine is 62, on the side of a desert dirt road, left to dry up into a dessicated corpse.

Still don't know what killed me.

Goldilocks's picture

Fifth Dimension - Up Up & Away , My Beautiful Balloon - Bubblerock Video 3
http://www.youtube.com/watch?v=sQVLsvZcr34 (2:57)

nosoeawe's picture

In Summary: SOCGEN says the market will go up, down, up and down, sometime in the next 10 years. 

Flying Wombat's picture

And in the footnotes of the research note, they also predict it will rain somewhere in the United States sometime this year.  :-)

MrTouchdown's picture

They used the "D" word. Eric Holder just felt his indictment muscle twitch.

Goldilocks's picture

Eric Holder to Rep. Louis Gohmert - "You don't want to go there, buddy!"
http://www.youtube.com/watch?v=Ay9eThmzp1Q (0:50)

John Law Lives's picture

Market cap-to-GDP was above 119% as of yesterday, but it seems the hope of moar crack pellets from central banks trump fundamentals.

http://www.gurufocus.com/stock-market-valuations.php

NOTaREALmerican's picture

SocGen: just more European panzies who hate everything America stands for, and the troops.

financialrealist's picture

lets see, down..11.4...17.6...27.9...42...my guess is 60.  second is 5.2% greater, third is 10.3% greater, fourth is 14.1 greater, my guess is 20% greater, a collapse of 62%.  putting it at 850 give or take....any takers?

NOTaREALmerican's picture

I predict it goes up-n-up-n-up-n-up until somebody big doesn't get paid (but I no longer know what the definition of "paid" is).

surf0766's picture

What difference does it make?

dirtyfiles's picture

pin point accuracy wow..

Spungo's picture

They expect gold to sell for 30% below mining cost? Who would be flooding the market with all that cheap gold?

financialrealist's picture

cental banks are holding gold down to hoard...when the system resests, gold reserves will play key role.  surpress price to buy and hoard. just look at china...everyones perapring...just tyring to keep the wheels from falling off as log as possible.   

hugovanderbubble's picture

SocGen Derivative Book Losses can exceed 35 Bn Euros ( Late May 2014)...WARNING------HOLLANDE