Joe Battipaglia, chief investment officer for Ryan Beck & Co., told CNBC’s “Squawk Box” that the U.S. economy is about to contract, undercutting stock valuations.
“What disturbs me now is that the run rate on new household debt formation is actually declining rather dramatically,” he said Thursday. “That typically precedes recessions. Four out of the last five were accompanied by an inverted yield curve, which we already have, and the decline in net new household debt. These conditions are now presenting to us in 2007, which means the economy may be weaker than expected at a time when the Federal Reserve cannot take their eye off the inflation fight -- and that puts them behind the curve once again.”
He said the growing weakness in consumer spending can be seen in the housing market, autos and slowing retail sales.
“How much longer can profits stay up?” Battipaglia said. “I think that whole profit story is looking in the rearview mirror.”
Jack Ablin, chief investment officer at Harris Private Bank, said “big liquidity” flowing into the economy from U.S. trading partners keeps interest rates low. “My sense is that the overall tide of big liquidity will continue to push markets higher,” Ablin said.
He said corporate profits are coming off highs of 9% or 10% and “can withstand some narrowing.”
“We’re walking right past the fact that first quarter profits, which started the year at an 8% expectation, are already cut to 4%," Battipaglia said, "and the year at 6%, probably are going to be cut to 2%. How sustainable are valuations in light of that despite the fact [that the] market has risen 20% to its recent highs? That’s where the problem lies.”