August will be a down month for the stock market as growth slows, warns UBS' Garthwaite

UBS chief global equity strategist Andrew Garthwaite anticipates a pause in the stock market's bull run, citing slowing U.S. economic growth and implied intra-index volatility near historical lows, which typically precedes cyclical underperformance. Garthwaite points to sharply weakening labor market indicators, forecasting non-farm payrolls to slow to 48K monthly in Q4 and turn negative, and expects August to be a down month, exacerbated by seasonal weakness and the Federal Reserve's inability to cut rates until September.

Analysis

According to Andrew Garthwaite, chief global equity strategist at UBS, the recent equity bull run is poised for a pause, primarily driven by slowing U.S. economic growth and technical market signals. The core of the argument rests on deteriorating labor market data, with UBS noting that 3-month annualized hours worked have weakened sharply and employment PMIs imply a slowdown. The firm projects a significant deceleration in non-farm payrolls to a monthly average of just 48K in Q4, eventually turning negative to -12K. Compounding this economic concern is a technical indicator: implied intra-index volatility is near the bottom of its range, a condition that historically precedes underperformance for cyclical stocks 84% of the time when it reverses. This cautious outlook is framed against the S&P 500's strong rebound of over 30% from April lows, suggesting the market may be vulnerable. The forecast for a down month in August is further supported by historical seasonality and the expectation that the Federal Reserve will not cut interest rates until September, removing a potential near-term market support.

Key Decisions for Investors

• Investors should consider adopting a more defensive posture for the near term, given the forecast for a market pullback in August driven by slowing growth and negative seasonality.
• It may be prudent to evaluate and potentially reduce exposure to cyclical stocks, as the analysis highlights a high historical probability of their underperformance when implied volatility rises from its current low levels.
• Closely monitor upcoming U.S. labor market data, particularly non-farm payrolls, as the UBS forecast for a sharp deceleration is a central pillar of the bearish thesis.