Stocks aren’t pricing recession, Fed finds

While U.S. stocks are well off their highs, they have not yet priced in a recession and would have further to fall if one materializes, according to a research note from the U.S. Federal Reserve Board.

Fed staff used dividend futures to examine whether equity prices reflect the risk of a recession. They found that, since the start of the year, expected dividends are essentially unchanged for this year and are down modestly for 2023.

These trends “translate into moderate downward revisions to expected real GDP growth for this year and the next,” the report said, but economic forecasts have been gloomier.

Since the start of the year, estimates for U.S. GDP growth for 2022 have been revised down by 1.8 percentage points, from 3.9% to 2.1%, and by 0.8 points next year, from 2.6% to 1.8%.

“Should a recession materialize in 2022 or 2023, we suspect that expected dividends and equity prices have much further room to fall,” the note concluded.

Staff

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