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The Tell: ‘We’ve only just begun to see the layoffs and squeezes on profit margins,’ warns Wells Fargo strategist

The latest rally in U.S. stocks following signs of cooling inflation isn’t likely sustainable, warned Scott Wren, senior global market strategist at the Wells Fargo Investment Institute.

Instead, Wren sees a lot hanging on a few signs that inflation may be starting to fade, triggering yet another bullish upswing for stocks on expectations that the Federal Reserve will “pivot,” or pause its interest-rate hikes.

“We have seen this happen numerous times over the last few months as economic data has been released,” Wren wrote in a Wednesday client note. But his team said they suspect that if the October consumer-price index “had come in two-tenths (or even one-tenth) above the consensus estimate,” the market response might not have been “as pretty.”

The S&P 500 index

was trading lower on Wednesday, but still up about 6% from a week ago, according to FactSet data. Looking through a longer lens showed a 10.6% increase for the S&P 500 since a month ago and a 13.2% climb for the Dow Jones Industrial Average

over the same stretch.

The rate on the benchmark 10-year Treasury note

dropped on Wednesday to about 3.7%, after hitting a peak of 4.2% in October. Yields and prices move in opposite directions.

“In our view, for a pivot, inflation needs to come down faster, and that’s most likely to happen in a recession,” Wren’s team wrote. “We believe we’ve only just begun to see the layoffs and squeezes on profit margins.”

The consumer-price index, a closely watched inflation gauge, pegged the cost of living in the U.S. at 7.7% in October, down from above 9% this summer.

Read: Americans have not been this worried about layoffs since April 2020 — and they also see no immediate end to rising prices

Layoffs have been most visible at major technology companies, including planned cuts at Facebook parent Meta Platforms

and at Twitter after Tesla

founder Elon Musk’s tumultuous takeover of the company for $44 billion.

The Wells Fargo Institute team said they expect the U.S. economy to be in a recession by the end of this year, or in early 2023, and for it to last until roughly midyear.

“We recommend that investors not chase this current equity rally,” the team noted.

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