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Sept. 5, 2019, 8:42 a.m. EDT

This big bank expects stocks to drop through the end of the year—here’s why

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By Steve Goldstein, MarketWatch


Getty Images
If the global economy gets stuck in the mud…

It’s not a law that big banks have to be bullish, even though they usually find a way to look on the bright side of life.

BNP Paribas, however, has a bit of a bearish streak, and in the call of the day , the French bank expects the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.28% to drop to 2,730 by the end of the year—from 2,937.78 on Wednesday.

Why so glum? In its fourth-quarter outlook the bank cites the U.S.-China trade war (though the news today on that front was optimistic), as well as the possibility of auto tariffs, weighing on the global economy. Central banks seem ready to help, though fiscal support is more in talk than practice. And the risks to the global economy weigh to the downside.

“Especially if exacerbated by additional downside shocks, the downturn could become nonlinear and morph into a fully-fledged global recession.” BNP Paribas expects more negative revisions to earnings forecasts as the global economy slows further, which will shift the market focus to earnings from valuations.

Naturally with this perspective, they prefer defensive stocks over cyclicals. “We expect increased dispersion of stock returns, with companies that have pricing power and low labor costs as a percentage of earnings likely to be more resilient. We view companies with higher balance sheet leverage and already-low margins as most at risk in a late-cycle environment,” they said.

BNP Paribas are bond bulls and expect the yield on the 10-year Treasury to drop to 1% by the fourth quarter.

The markets

Following the 237-point rally on Wednesday for the Dow industrials /zigman2/quotes/210598065/realtime DJIA +0.09%   on hopes for eased tensions in Hong Kong, U.S. stock futures /zigman2/quotes/209948968/delayed ES00 -0.16%   /zigman2/quotes/210407078/delayed YM00 -0.11%   /zigman2/quotes/210219788/delayed NQ00 -0.20%  rallied on China trade talks.

Gold futures /zigman2/quotes/210034565/delayed GC00 -0.19%  fell and the yield on the 10-year Treasury /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -0.64%  rose.

Asian /zigman2/quotes/211618636/realtime XX:ADOW +0.16%  and European /zigman2/quotes/210599654/delayed XX:SXXP -0.10% stocks rose.

The buzz

News that U.S.-China trade talks will continue in early October in Washington spurred another risk-on day, following what was described as a call that “went well” between China Vice Premier Liu He, U.S. Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer. German manufacturing orders slumped in July in another reminder of the state of the global economy.

On the economics front, with ADP reporting a 195,000 increase in private-sector payrolls, a 1,000 increase in weekly jobless claims, with the key payrolls report due Friday. Messaging service Slack Technologies /zigman2/quotes/212180539/composite WORK +1.52%  may be active as it reported strong revenue growth and deepening operating losses.

Chart of the day

UBS has cut its 10-year yield forecast by a quarter-point, to the same level BNP Paribas has: 1%. That is due to its lowered global growth forecasts. The chart shows, during the last rate-cut cycle, how Fed interest rate cuts spurred the market into expecting even more rate cuts. UBS now sees five quarter-point cuts by the end of 2020.

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/zigman2/quotes/210599714/realtime
US : S&P US
2,997.95
+8.26 +0.28%
Volume: 1.62B
Oct. 17, 2019 5:02p
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/zigman2/quotes/210598065/realtime
US : Dow Jones Global
27,025.88
+23.90 +0.09%
Volume: 225.06M
Oct. 17, 2019 5:02p
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/zigman2/quotes/209948968/delayed
US : U.S.: CME
$ 2,993.25
-4.65 -0.16%
Volume: 50,617
Oct. 17, 2019 11:51p
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/zigman2/quotes/210407078/delayed
US : U.S.: CBOT
$ 26,962.00
-31.00 -0.11%
Volume: 8,974
Oct. 17, 2019 11:51p
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/zigman2/quotes/210219788/delayed
US : U.S.: CME
$ 7,936.50
-16.25 -0.20%
Volume: 22,351
Oct. 17, 2019 11:51p
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/zigman2/quotes/210034565/delayed
US : U.S.: Nymex
$ 1,495.50
-2.80 -0.19%
Volume: 22,182
Oct. 18, 2019 12:51a
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/zigman2/quotes/211347051/realtime
add Add to watchlist BX:TMUBMUSD10Y
BX : Tullet Prebon
1.74
-0.01 -0.64%
Volume: 0.00
Oct. 18, 2019 12:59a
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/zigman2/quotes/211618636/realtime
XX : Dow Jones Indices
3,239.60
+5.21 +0.16%
Volume: 0.00
Oct. 18, 2019 1:01a
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/zigman2/quotes/210599654/delayed
XX : STOXX
393.08
-0.38 -0.10%
Volume: 0.00
Oct. 17, 2019 5:50p
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/zigman2/quotes/212180539/composite
US : U.S.: NYSE
$ 24.00
+0.36 +1.52%
Volume: 6.64M
Oct. 17, 2019 6:30p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$12.86 billion
Rev. per Employee
N/A
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/zigman2/quotes/203625533/composite
US : U.S.: Nasdaq
$ 27.77
+0.33 +1.20%
Volume: 4.35M
Oct. 17, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
5.76%
Market Cap
$33.48 billion
Rev. per Employee
$673,308
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Steve Goldstein is MarketWatch markets editor for Europe. Follow him on Twitter: @MKTWgoldstein.

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