American Bank Predicts 17% Stock Rally if Recession Averted

American Bank has presented a bullish outlook for the U.S. stock market, suggesting that if a recession is averted, the market could see a significant rally of 17%. This optimistic view is based on historical data that shows when economic pessimism does not translate into an actual recession, the stock market tends to experience substantial rebounds.

According to American Bank, there is a growing gap between the pessimistic sentiment reflected in "soft data" and the actual economic performance. Historically, when economic pessimism does not lead to a recession, the U.S. stock market has averaged a 17% increase over the subsequent 12 months, significantly outperforming long-term averages.

Currently, the economic indicators present a mixed picture. The ISM Manufacturing PMI has contracted for the second consecutive month, falling to 48.7% in April, indicating a downturn in the manufacturing sector. Companies surveyed cited concerns over high tariffs and a challenging business environment. Consumer sentiment is also at its lowest since the pandemic, with the Conference Board Consumer Confidence Index dropping to its lowest level since the pandemic began. The expectations index hit a new low since 2011, signaling a strong possibility of an economic recession.

However, these soft data points contrast sharply with robust hard data. Unemployment claims remain low, the dollar is stable, credit spreads are narrowing, and real wages are growing faster than inflation. American Bank notes that the disparity between pessimistic sentiment and optimistic economic facts is at a historical high.

American Bank analysts do not foresee an imminent recession, a view bolstered by the temporary truce in tariffs between the U.S. and China. The reduction in trade tensions is crucial for investors, as the U.S.-China trade friction has been a significant risk factor for recession concerns.

Despite a weak first-quarter GDP performance, attributed to a surge in imports ahead of tariff disruptions, American Bank predicts a significant turnaround in the second quarter. They forecast a 2% GDP growth and a slowdown in final demand. If a recession is avoided and the 17% growth projection materializes, the S&P 500 index could reach nearly 6900 points.

Additional factors supporting a bullish summer outlook for U.S. stocks include progress in trade negotiations, policy shifts towards tax cuts and regulatory easing, and the repatriation of manufacturing from emerging markets.