Investing.com -- One of the key takeaways from Wednesday's post-FOMC press conference is the Federal Reserve’s strong confidence that a recession can be avoided.
This optimism sparked a risk-on sentiment in markets on Thursday, with the S&P 500 hitting new all-time highs and the 10-year Treasury yield rising by 3.5 basis points.
The latest economic data has also shown resilience. Industrial production saw growth in August, and early September manufacturing surveys from regional Fed banks provided encouraging signs. Although August retail sales presented some mixed details, they did not signal an imminent recession, while housing starts showed a recovery last month.
However, strategists at BCA Research remain cautious, saying they are not yet ready to abandon their U.S. recession call on a 12-month horizon. The investment research firm cited three key factors.
First, BCA points to the labor market and its impact on consumer spending. The firm expects that the ongoing softening in labor demand “will continue to exert downward pressure on wage growth and attenuate the boost from household spending's main driver at the same time as other consumption tailwinds are fading."
Second, the strategists argue that aggressive rate cuts will not significantly change their recession outlook. They note that monetary policy operates with a lag, meaning current conditions reflect previous tightening, and the effects of recent cuts may only materialize when it’s too late to prevent a downturn.
Third, despite this week’s 50-basis-point rate cut, monetary policy remains restrictive, with the Fed funds rate still above the Fed’s own estimate of the neutral rate.
While they acknowledge that the odds of a recession in 2024 have decreased, and stocks could rise in the short term as investors anticipate a soft landing, the strategists caution that further gains may leave equities more exposed to downside risks.
"We are thus reluctant to chase equities higher and remain underweight," they conclude.