Clocktower strategist sees earnings faltering amid rate hikes and rising energy prices
Meet Chunk, the 2025 Fat Bear Week champion. A Clocktower strategist is predicting a market pullback in 2027.
In 2022, the wheels came off the stock market, largely blamed on interest-rate hikes, slumping bonds and energy shocks from Russia's invasion of Ukraine.
Our call of the day from alternative asset management and advisory firm Clocktower's chief macroeconomic strategist Eric Wallerstein has warned of similar fallout for 2027 that could push the S&P 500 SPX to 6,300, nearly 20% below from current levels.
"A garden variety bear market is increasingly becoming my base case or it's getting close to it," Wallerstein told the Other People's Money podcast, on Wednesday about his recently published outlook.
"I don't think a bear market is crazy. I think we're all a little AI-brained right now and can't see it, but it's hard to see further than two months into the future with really wide confidence bands."
He sees an earnings slowdown driving that stock slump, alongside a falling dollar, with investors likely piling into gold (GC00), taking it to $6,000 per ounce next year. He gave his bear case a 50/50 chance of happening, owing to unpredictability of the Iran war and the artificial-intelligence trade.
"It's the same mechanism as 2022: energy shock, excessive valuations, central bank tightening globally, and then we'll actually have a fiscal drag," he told the podcast. That's as he's also worried about the labor market, with more concerns headed into 2027 given the lack of "cushion" for jobs overall.
"If we keep hiking into this oil shock... it's not just that refined products get more expensive and food gets more expensive; it's that we literally tighten monetary policy everywhere to try to combat it, which is just a terrible recipe for growth," said Wallerstein.
In his note to clients released this week, he spoke of stocks "priced for perfection" against a backdrop of possible stagflation, low liquidity, weak real incomes and more pain outside sectors not exposed to AI.
He also pointed out that interest payments are now a record 3.15% of gross domestic product, and warned that more Federal Reserve hikes could drive up debt-servicing costs and long-term yields as investors demand more compensation for holding them.
Debt-service ratios are low, but interest costs are rising and prospects of ever borrowing at ultralow rates again "look grim," says strategist Eric Wallerstein.
Wallerstein told clients that earnings expectations are "inflated," as stocks headed for the best multi-year run of such growth in 30 years, but that previous episodes, such as post-dot-com bubble pop, were followed by pullbacks.
"I'm expecting further compression to a 15 times forward P/E [price/earnings ratio], in part because of rising interest rates and the new Fed hiking cycle," he said.
Wallerstein said the equity risk premium - the extra return stocks should get compared to government bonds - is flat, even though investors should earn a premium for equity investing. That implies investors believe earnings will exceed expectations or interest rates will fall, neither of which he sees as likely.
"Stock-market expectations have yet to reflect the reality of an energy shock and higher rates, but will have to eventually price them in. Even a whiff of a slowdown in AI will compound the repricing," he told clients.
He also worries a possible AI credit event is waiting in the wings to hit stocks. "I believe equities are sniffing out the deteriorating credit quality in the $3 trillion of off-balance sheet items being used to finance the AI capex boom."
Foreign selling as their U.S. equity holdings have doubled to $3.1 trillion since 2021 and fewer buybacks are also a worry going forward.
He added that recent talk of slowing AI progress could be trouble for earnings going forward.
"AI could either fail - the capex boom could go too far, not fail, but just like the telecom bubble - or it could kill us all, or there could be regulatory capture," he told the podcast. "Literally no one knows what it's going to look like in six months."
The markets
U.S. stock futures (ES00) (YM00) (NQ00) are dropping, led by technology as the 10-year Treasury yield BX:TMUBMUSD10Y hits 5.146% and oil prices (CL.1) (BRN00) climb.
Key asset performance Last 5d 1m YTD 1y S&P 500 7706.03 2.04% 0.40% 12.57% 16.09% Nasdaq Composite 26,936.04 3.69% 3.08% 15.89% 19.73% 10-year Treasury 5.15 21.30 47.60 97.80 98.20 Gold 4288.6 -2.10% -7.87% -1.01% 13.44% Oil 93.9 -7.11% 12.40% 63.56% 43.97% Data: MarketWatch. Treasury yields change expressed in basis points
The buzz
New York Fed President John Williams called it "reasonable" to expect one more rate hike this year. Former Dallas Fed chief Robert Kaplan said the market is pricing in too many hikes.
Weekly jobless claims are due at 8:30 a.m. Eastern and new home sales at 10 a.m. Richmond Fed President Thomas Barkin is scheduled to speak at 8:30 a.m., followed by Philly Fed President Anna Paulson just after 10 a.m.
The Treasury will announce the results of a $44 billion auction of 7-year notes at 1 p.m.
MGM Resorts stock (MGM) is sliding after the Wall Street Journal reported investor Barry Diller pulled his bid to buy the casino gaming company.
JPMorgan boosted its Meta (META) price target, saying its Muse AI agent could become the most popular app since ChatGPT. Meta stock is down amid a premarket tech slump.
A test that screens for 50 cancers waits for FDA approval.
Top tickers
These were the top-searched tickers on MarketWatch as of 6 a.m.:
Ticker Security name NVDA Nvidia TSLA Tesla GME GameStop MU Micron AMZN Amazon META Meta SPCX SpaceX AMD Advanced Micro Devices AAPL Apple TSM Taiwan Semiconductor Manufacturing
-Barbara Kollmeyer