Hedge fund mogul: An economic recession is imminent and will severely impact the "full cup" of the US stock market

Senior Wall Street strategist David Rosenberg recently issued another warning, stating that a recession in the U.S. economy is imminent, and the currently "full cup" state of the U.S. stock market will suffer significant damage as a result.

Rosenberg believes that from the perspective of the U.S. stock market, the current situation is not an optimistic "half cup of water," but rather a "full cup," which means the market is ignoring risks such as tariffs, taxes, geopolitical conflicts, and economic concerns.

He stated:

"My view is different from the market's; we will see how it turns out, but this is the signal being sent by the current market pricing."

He is optimistic about the undervalued bond market and emphasizes that the signals from the dollar and bonds contradict the current optimistic sentiment in the stock market, suggesting that the S&P 500 index may struggle to maintain its high levels.

U.S. Stock Valuations Too High, Signs of Economic Recession Emerge

Rosenberg, a former senior strategist at Merrill Lynch, has now established his own company, Rosenberg Research. He believes that although he is not entirely bearish, the current valuation levels make him cautious:

"I believe there is always a gray area, but I prefer to invest when the wind is at my back. Currently, a price-to-earnings ratio of 22 times, in the face of a risk-free rate above 4%, is not attractive mathematically."

He emphasizes that his funds will be directed towards the "undervalued, underheld, and actually disparaged" bond market.

Regarding the judgment of this economic recession, Rosenberg admits that he had similar concerns in 2022 and 2023, but he states that he "will not cry over spilled milk" and reiterates his bearish view.

He specifically mentions that although the Federal Reserve's interest rate hikes initially had little impact on homeowners, loans are now starting to be extended. Mortgage refinancing activity is increasing, and the new supply is exceeding demand by 25 percentage points. Additionally, the S&P/Case-Shiller 20-City Composite Home Price Index in the U.S. fell for the second consecutive month in April (seasonally adjusted).

Rosenberg also points out that the labor market is cooling, and inflation has remained moderate. He criticizes the Federal Reserve for "sitting idly like a startled deer," believing that by the time the Federal Reserve lowers interest rates again, it may be too late to save the economy.

Inflation Slowing and Market Divergence

Regarding inflation, Rosenberg believes that the service sector, which is not affected by tariffs, is currently experiencing a significant deflationary trend. He believes that inflation is a lagging indicator, and any price increases resulting from tariffs will be "one-time, perhaps two or three times," and will ultimately be offset by a loosening labor market. He predicts that next year's inflation levels will be lower than they would be without tariffs.

He further emphasizes that the messages conveyed by the dollar and bond markets contradict the optimistic sentiment currently exhibited by the stock market. He asks, "Who will you invest your money with? The dollar and bonds, or the S&P 500 index?" He believes that a convergence will ultimately occur between the two Rosenberg stated that his funds will bet on signals from the dollar and bond markets. If these signals are correct, then the S&P 500 will not stay above 6,000 points for long.

As of Thursday's close, the S&P 500 was at 6,141 points, slightly below its historical high.

So far this year, the dollar index has fallen by 10%, while the yield on the 10-year U.S. Treasury bond, which moves in the opposite direction, has dropped by 32 basis points.