What if Elon and Goldman Sachs are wrong about the future of stock investing?

Elon Musk has stated this week that it believes a recession in stock investing is likely in the short term, while investment bank Goldman Sachs has just updated its forecasts to show that a recession in the next two years. But there are three reasons why both could be wrong...

1. Profit margins on stock investing are at extraordinarily high levels ​

The chairman of the Federal Reserve said last week that the central bank would continue raising interest rates in the US until there was a notable decline in inflation compared to the previous month. As a general rule, if a central bank continues to raise rates after inflation has peaked, it has gone too far and may trigger a recession.

But there's a reason the odds might favor investing in stocks this time. Corporate profits are likely to fall from their sky-high levels due to rising supply, not falling demand. Demand has outstripped supply for everything from microchips to energy, as the pandemic receded and supply disruptions in countries like China, Russia and Ukraine drove up prices for available products. The expectation is that supply will improve globally in the coming months, and that will lead companies to cut prices to be competitive, helping to lower inflation. And of course it will reduce their profit margins, but companies would probably prefer to have more competition with stable demand than to have declining demand, which is what usually accompanies rising interest rates.

2. There is a lot of cash in the system ​

Households have more cash (approximately $3 trillion more) than at the beginning of the pandemic, so people are in a better position to cope with rising food and fuel prices. Of course, those $3 trillion are not distributed equitably (or fairly, for that matter). And the poorest are the ones who are suffering the most. Before prices rose, they spent almost 30% of their income on food and energy, so their cash balances have decreased. But overall consumer spending is not typically driven by those with the lowest incomes, and the wealthiest continue to spend so far. This will reduce your savings, no doubt, but it may also help the American economy avoid a recession.

Companies, for their part, have about $300.000 billion of additional liquidity and, for now, debt costs remain low. This should encourage companies to continue investing in equipment and machinery (also known as capex) – and that spending could help avoid a recession.

3. Wage growth is already slowing​

When inflation soars, as it has, and workers are hard to find, companies rush to raise wages, which in turn fuels inflation. When a central bank raises interest rates in response to all that inflation, the effect eventually trickles down to investing in stocks, which face higher costs (including more expensive workers). This can lower your profits and consequently lead to staff cuts. And those job cuts are usually quickly followed by a slowdown in the rest of the economy. But wage growth has slowed recently: from an annualized rate of 6,5% in the third quarter of last year to around 4% in the second quarter of this year, according to the research firm Pantheon Macroeconomics. And that slowdown could be here to stay, especially given the recent increase in the number of people actively seeking employment.

Typically, wage growth increases late in the cycle, forcing central banks to worry about “built-in” or persistent inflation. But with wage growth already slowing, that seems unlikely this time. In fact, the most wage-sensitive elements of core inflation are already slowing considerably. This suggests that the monthly slowdown in inflation that the Fed wants to see could happen sooner than most economists expect – and that by September, the US central bank could be in a position to start making further increases. small ones of the type, if there are any. In that scenario, a recession would be very unlikely. And if one were to occur, it would be brief and mild.