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Stock market returns to be ‘violently flat’ amid slowing growth: Strategist

While some experts are beginning to sound the alarm over the threat of stagflation for the remainder of 2022, a combination of surging inflation and slowing growth poses an ever-growing risk to markets. 22V Research founder Dennis DeBusschere believes that investors should indeed expect stock market returns to be muted in the medium term.

“So we’ll start with the upside. It seems pretty clear to us that the Fed needs to ratchet down demand growth,” DeBusschere told Yahoo Finance Live. “Demand growth can slow on its own, maybe, because of demand destruction as it relates to commodity prices. But either way, economic growth is likely to slow over the next six to nine months. Inflation needs to come down.”

He noted that weaker corporate pricing power can be expected if the brakes are pumped on inflation, as the Federal Reserve intends with its interest rate hike campaign. The Fed is set to convene again from May 3-4, where DeBusschere thinks near-term interest rates could be raised by as much as 50 basis points at a time.

“So if growth is slowing, inflation’s lower, you’re obviously going to be capped on rates to a certain extent,” he added. “And if you’re capped on rates, then your cash return yields in the market do look pretty attractive. Again, assuming no severe recession down in the 4200 level [for the S&P 500 (^GSPC)]. So that is how we get to a ‘violently flat’ kind of call.”

DeBusschere joined Yahoo Finance Live to discuss economic growth, inflation, market volatility, and the outlook for stocks amid market swings. 22V Research is a New York-based financial research firm focusing on investment strategy, quant research, policy research, technical analysis, and economic projections.

Markets have bounced back from an early March trough, but uncertainty looms as to whether the current “relief rally” can be sustained in light of anticipated hikes and macroeconomic threats posed by the Russia-Ukraine war. However, DeBusschere believes it would be “very hard” for the Fed to raise rates to the point of inducing a recession this year.

“I think the odds of [a recession] are extremely low,” he said. “So where I fall in the debate is I think that it’s way overblown. And you see it in market pricing, the short curves. So like, your three-month bill through 18 months is at a record steepness. So yeah, the long curves are flat or slightly negative, but near-term recession risk, whether you see that in credit or other measures like I just mentioned, is extraordinarily low.”

FILE – Federal Reserve Chairman Jerome Powell testifies before the Senate Banking Committee hearing, Thursday, March 3, 2022 on Capitol Hill in Washington. Powell said Wednesday, March 23, that new forms of digital money such as cryptocurrencies and stablecoins present risks to the financial systems and will require new rules to protect consumers. (Tom Williams, Pool via AP, File)

A critical upcoming earnings season

In any case, the upcoming earnings season will be critical in gauging how companies across various sectors have been able to navigate geopolitical risks and surging prices during Q1 2022. U.S. stock buybacks also appear to be hitting record highs ahead of earnings, with new repurchase announcements by U.S. companies reaching over $300 billion in the first quarter.

Stock buybacks typically occur when a company believes that the market is undervaluing its shares, suggesting that firms are maintaining some level of confidence for the road ahead. On the other hand, DeBusschere does not discount the possibility of a broader market correction before the end of 2022 as corporate earnings contend with turbulent inflation levels.

“I do expect a market correction later on this year related to numbers hitting,” he said. “For now — keep this in mind, I think this is not something that’s fully internalized by investors — if we have a lot of inflation in 1Q, that’s good for earnings. That means companies are passing things along, right? The problem is when wages stay sticky high and inflation at a top-line level starts to slow. That’s where you get your margin squeeze.”

Thomas Hum is a writer at Yahoo Finance. Follow him on Twitter @thomashumTV

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