Investors should short the US stock market as recessionary fears become self-fulfilling, investment research firm says

According to a research note, investors should short the US stock market due to fears of a recession.

The investment research firm believes that the US will enter a mild recession due to the Fed's current tightening cycle. The recession could get worse if the Fed tightens.

There is a path to a soft landing in the current environment, but the problem is that central banks are getting panicky. There is a rumour going around that the Fed is trying to bring inflation down. Headlines and forecasts have a negative impact on investor, consumer and corporate behavior.

In the short term, bad news is good news for the market and there could be a rally in stock prices even in the face of worsening economic data. Because of slower growth, the Fed doesn't need to raise interest rates as much.

"Rising recession fears have led to declining yields and, in a roundabout way, to a rally in the stock market," he said. In the long-term, a recession is a big negative for stock prices.

It seems obvious, but it's worth repeating given recent price action. Growth is above trend, struggle when it's below trend and fall when it's negative for the stock market.

Corporate earnings are likely to be hurt by the likely recession as they have been the main driver of stock prices over the long term.

Counter-cyclical inflation depresses margins but the estimates are still very high. We are likely to get a downgrade in the consensus estimates. The trend of US earnings revisions turning negative is expected to accelerate. If there is a recession, earnings are likely to decline rather than just grow slower.

There seems to be more room for equity prices to fall with growth set to moderate and expectations still anchored to the post-pandemic boom of 2020. If you follow the firm's recommendation, you can short the SPY.