David Rosenberg: The Fed Is Going to Trip, Recession Odds Now Above 50%

Summary

David Rosenberg argues that markets and the economy show unusually large imbalances. He sees a narrow, potentially bubble-like equity market alongside weak underlying growth. He says investors should prioritize capital preservation and prepare for a possible recession or sharp growth slowdown.

Markets and economic outlook

• Market breadth and concentration: Ten stocks account for more than 40% of market capitalization. Although major indexes were near record highs, the average and median stocks were down nearly 20%, and about 40% of S&P 500 companies were in bear markets.
• Valuations: The Shiller CAPE was above 40 for five consecutive months, a level Rosenberg said had not occurred since 2000. He estimated the equity earnings yield at about 2.5%, compared with a real yield above 3% on long-term Treasuries, making the equity risk premium negative.
• Economic growth: Real GDP was running only a little above 2%, despite strong AI-related investment. Rosenberg contrasted this with late-1990s growth near 5% and employment growth around 2.5%.
• Uneven investment: AI capital spending was up more than 16% year over year, and data-center construction more than 60%. By contrast, other business capital spending was down 0.7%, while non-data-center commercial and industrial construction was down 7%.
• Consumer and labor-market fragility: Real disposable income had shown little growth over the prior year while real consumer spending was running near 2.5%. The savings rate had fallen from roughly 5.5% toward 4%, versus a pre-pandemic norm near 8%. Rosenberg said weak hiring, rather than layoffs, was the key labor-market concern.
• Recession risk: He put recession odds above 50/50, particularly if the Fed follows through on the rate hikes priced by markets. Even without a formal recession, he expected a significant slowdown and said real GDP growth could fall below 1%.
• Potential headwinds: Rosenberg said fading fiscal support and cancellations or postponements of data-center projects could weaken growth. He estimated the AI-project pullbacks could subtract another 0.7 percentage point from GDP growth, for an estimated 1.3 percentage-point negative arithmetic contribution from the cited forces. He also warned that a return of the savings rate toward normal could sharply reduce consumer spending.
• Fed policy risk: He believes the Fed risks tightening into a supply shock when growth is modest and the yield curve is unusually flat. The 2-year/10-year curve was barely above 30 basis points, compared with a historical level around 120 basis points when tightening cycles begin. He criticized a focus on headline inflation when energy and other supply-driven prices are outside the Fed’s direct control.
• Inflation interpretation: Rosenberg argued that recent inflation largely reflected repeated supply shocks, not persistent excess demand. He cited core inflation around 2.6%, the Dallas Fed trimmed-mean PCE measure at 2.2% year over year, and core goods inflation at 0.7% despite higher tariffs. He warned against extrapolating short-term price shocks into permanent inflation.
• Historical comparisons: He compared the current episode with the 2008 oil-price shock and the 1990s technology bubble. He noted that the 2008 energy-driven inflation spike later reversed sharply, and warned that a valuation-driven bear market can be severe even if the economic recession is mild.

Portfolio approach and framework

Rosenberg’s stated approach is to de-risk without moving entirely out of equities:

• Rebalance the portfolio and reduce equity beta; he favors preserving gains rather than trying to time an all-in or all-out move.
• Shift some allocation away from the S&P 500 and toward U.S. Treasuries.
• He said his model portfolio had relatively little in 2-year notes, because markets had priced in substantial Fed tightening, but held a large allocation to 10-year notes in anticipation of weaker growth or recession. He also mentioned the 7-year sector.
• Consider defensive areas such as healthcare, utilities, and REITs, which he believes could benefit if interest rates fall and may be more resilient in a downturn.
• Maintain some cash for liquidity. His model portfolio had recently increased its cash allocation to 10%, with the aim of being able to buy assets if markets weaken.
• He remains positive on gold as a diversifier and hard asset. He said gold had faced pressure from higher real rates and a stronger dollar, but cited support above roughly $4,100.
• Keep diversification and risk management central; he cautioned against assuming equities are safer than bonds or relying on any single asset or market outcome.

Bonds, positioning, and risk indicators

• Rosenberg said a 10-year Treasury yield rising to 6% would roughly leave an investor with no total return over the next 12 months, while a return to 4.5% could produce about a 14% total return. He viewed that as an attractive risk/reward trade-off.
• He said household financial assets were at a record 73% allocation to equities and only 7% to bonds. For baby boomers, he cited a 55% equity share versus a more typical 35%.
• He cited bullish equity sentiment of 78% in a market survey and described bonds as heavily under-owned and unpopular.
• He said financial conditions had tightened by about 140 basis points over three months, through movements in the dollar, asset prices, credit spreads, and market and mortgage rates.
• He pointed to Oracle credit default swaps trading wider than in summer 2008 and CoreWeave CDS pricing that he characterized as implying more than a 50% default probability. He presented these as potential early signs of credit stress in the AI investment cycle, noting that credit weakness can precede equity weakness.

Assets and instruments mentioned

• Equities and indexes: S&P 500, Nasdaq; Microsoft, Nvidia, Apple, Amazon; Oracle and CoreWeave.
• Fixed income and rates: U.S. Treasuries, including 2-year, 7-year, and 10-year notes; Treasury yields; TIPS and breakeven inflation rates; corporate credit and CDS.
• Other assets: Gold, silver, oil/WTI, U.S. dollar, cash.
• Sectors: AI and data centers, technology/hyperscalers, healthcare, utilities, REITs, energy, and housing/construction.
• Economic indicators: GDP, employment and wage growth, personal savings rate, CPI, PCE, the Dallas Fed trimmed-mean PCE, yield curve, and equity risk premium.

Timelines and cautions

• Rosenberg described the market as being in the “extra innings” of a cycle and urged investors not to extrapolate a long bull market indefinitely.
• He anticipated heightened market volatility over the next 12–18 months and a weaker economy in the following year. He also discussed midterm elections scheduled for November 3 and the possibility of fiscal gridlock afterward.
• He cautioned that bear markets can fall faster than bull markets rise, and that valuations can compress sharply even if corporate earnings remain strong.
• No explicit “not financial advice” disclaimer appears in the subtitles. The episode includes promotional segments for Monetary Metals and Augusta Precious Metals.

Presenters and sources

Julia La Roche, host of The Julia La Roche Show; David Rosenberg, founder and president of Rosenberg Research and author of Bear in the Bull Ring. Promotional segments mention Monetary Metals and Augusta Precious Metals.