Stocks had an unpleasant 6 months. The second half could also be ugly.

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Bond markets are pricing in further significant interest rate hikes this year, but earnings forecasts from some equity analysts remain optimistic.

Michael Nagle/Bloomberg

It was a first half destined to haunt investors. The past six months have been historically bad for stocks, bonds, cryptocurrencies, and virtually every other asset class outside of commodities.

Despite its rally at the end of June, the

S&P 500 Index

fell 20.6%, marking its worst first half of a year since 1970.

Dow Jones Industrial Average

The 15.3% fall in the first half was the worst since 1962, while the 29.5% drop in the

Nasdaq Compound

and 23.9% by the

Russell 2000

produced the worst first half of every index on record. The Bloomberg US Agg, a broad fixed income index, fell 10.7%. It is also its worst first half, based on data dating back to 1975. In contrast, the price of oil jumped more than 40% in the United States during the same period, while many metals and materials agricultural raw materials have made considerable gains.

As for the second half? “There are a million things going on,” says Richard Bernstein, CEO of Richard Bernstein Advisors, “But there are two certainties: the Fed will tighten and earnings will slow.”

For now, bond markets are pricing in further significant interest rate hikes this year, but some earnings forecasts remain optimistic. Jonathan Golub of Credit Suisse notes that as earnings recessions approach, the dispersion of analysts’ estimates tends to widen, akin to the

Cboe Volatility Index,

or VIX, doping ahead of bear markets. That didn’t happen, according to Golub data. “There may be recession fears, but the earnings chart doesn’t reflect that,” he says.

In fact, analysts as a whole have raised their forecasts for S&P 500 earnings and earnings per share in 2022 and 2023.

“Apparently, analysts haven’t yet received any notes on the recession from the managements of the U.S. companies they track,” Ed Yardeni of Yardeni Research wrote last week. “That’s because most of them don’t have a recession so far.”

That may not be the case for much longer, if the growing consensus calling for a recession over the next 18 months is confirmed. Some 71% of some 400 global investors surveyed by Deutsche Bank in late June expect a US recession in 2023, up from just 29% in February. 17% expect a recession to start in 2022, up from just a few percent a few months ago.

Tom Porcelli, chief US economist at RBC Capital Markets, said this “could be the most anticipated recession of all time.” Google searches for “recession” and related terms are as high today as they were in March 2020. Noted economist Cardi B tweeted recently to his more than 23 million followers about a recession.

Porcelli sees a weaker job market through the end of this year, with lower confidence and lower savings weighing on consumer spending, which accounts for nearly 70% of US gross domestic product. Add to that a likely decline in the housing market, lower capital spending by cautious businesses, stubbornly high inflation and aggressive interest rate hikes from the Federal Reserve, and a recession is in sight for the second half of this year or early 2023, he argues.

It doesn’t need to be a deep and prolonged contraction, like the one that followed the 2007-09 financial crisis, but it will contrast sharply with 2021’s rapid rebound from the pandemic recession. Porcelli sees a “mid-cycle downturn” similar to that of 1994-95, in the midst of another Fed hike cycle.

The latest economic data did not inspire confidence in the outlook. The Conference Board’s consumer confidence indicator continued to weaken in June, falling to 98.7 from 103.2 in May. Respondents remained optimistic about the current job market, but other areas of the survey were less optimistic: Expected trading conditions were the weakest since 2009, and average inflation expected over the following year rose 0.5 percentage points from May, to 8.0%—the highest reading in the survey’s 35-year history.

On Wednesday, first-quarter GDP was revised down to 1.6% annualized. On Thursday, consumer spending data for May was weaker than expected – a decline of 0.4% in real terms – and a downward revision to April’s figures. The price index for basic personal consumption expenditure rose 0.3% in May, for an annual growth rate of 4.7%. That was below the consensus forecast of a 0.5% rise, but well above the monthly rate of 0.17%, in line with the Fed’s 2% annual inflation target.

Then on Friday, the ISM Manufacturing Purchasing Managers’ Index for June came in at 53.0, missing the consensus forecast. It was the lowest reading since 2020. The Atlanta Fed’s GDPNow economic model projects a 1.0% annualized rate of decline in real GDP for the second quarter, down from a previous forecast growth of 0.3%.

This coming Friday brings the June jobs data, then the inflation numbers are released the following week, and a potentially volatile second quarter earnings season is just around the corner. The next Fed meeting will be at the end of July.

Taken together, the data is unlikely to deflect policymakers from their current rate hike path, despite decelerating economic fundamentals. It’s a tough combination for investors and leaves virtually no place to hide in the markets.

To be significantly bullish today requires some mental gymnastics from investors. An economic contraction could prompt the Fed to slow the pace of its interest rate hikes, putting less downward pressure on equity multiples and less upward pressure on bond yields, which move inverse price.

But the Fed and other central banks around the world are determined to bring inflation down, and it may very well take the demand-killing weight of a recession to achieve that goal. The combination of a weaker economy – but not weaker to crisis level – and a Fed fixated on inflation portends a tough second half for investors.

Write to Nicholas Jasinski at

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