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Stocks Flash Recession Warning as Trouble Spreads to Industrials

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US small-cap and industrial stocks are dropping, typically signals of a recession, but in a year where equities have already beaten expectations some investors are dismissing the moves as little more than noise — for now.

The S&P 500 Industrials index peaked on Aug. 1 and is down about 8% since then, teetering on a correction after several major US carriers cut their profit outlooks for the third quarter on a sudden jump in oil prices. The small-cap Russell 2000 Index has lost more than 11% from its July 31 closing high, roughly twice the decline in the S&P 500 Index over the same time. Steep drops in small-cap and industrial stocks typically occur when the economy is in a recession.

That said, there is hope for stocks. Earnings season is coming, which may matter more than rates for stock prices now according to a model from Bloomberg Intelligence. Companies are expected to post profit declines of just 1.1% in the third quarter, followed by gains for at least the next year, according to Bloomberg Intelligence data. Plus the Federal Reserve this week said it’s forecasting stronger economic growth than it expected just a few months ago.

“It’s too soon to say the stock market is signaling a recession,” said Ed Clissold, chief US strategist at Ned Davis Research, whose firm has a year-end target of 4,500 on the S&P 500 and forecasts a chance that the US will slump into an economic slowdown in the first half of 2024. “If we are marching toward that, it would appear this would be at very early stages, but we need to wait a few more weeks to see where the year-end momentum is going.

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