Don't chase the rally in stocks because a recession is coming and current earnings estimates are too high, a Wells Fargo strategist says

• Wells Fargo isn't in favor of chasing the rally in US stocks, and is looking to fade the year-to-date gains, the bank's senior global market strategist said.
• Equities will have a 'bumpy ride' as the economy enters a recession in the second half of the year, according to Scott Wren.
• "We're expecting a recession. We're not expecting the Fed to cut rates, we think earnings estimates are too high," he told CNBC.

It's probably not a good idea to chase the current rally in US stocks, because a recession is fast approaching, according to Wells Fargo's senior global equity strategist.

The US bank is in favor of fading the year-to-date gains in equities and adopting a defensive position in anticipation of a "bumpy ride" over the coming quarters, Scott Wren told CNBC on Tuesday. The economy will likely enter a recession in the second half, and it may last through the first quarter of 2024, according to him.

US equities have rallied this year despite analysts warning of an oncoming economic downturn, buoyed in part by expectations that cooling inflation will allow the Federal Reserve to reverse some its interest-rate increases. Annual gains in consumer prices slowed to 4% in May, from as much as 9.1% in mid-2022.

"We're expecting a recession. We're not expecting the Fed to cut rates, we think earnings estimates are too high. So for us, we want to fade this rally and look to pick up some stocks at lower levels," Wren told the outlet. "We've been defensive, that's how we stand right now. We do not want to chase this rally."

The S&P 500 index has climbed almost 14% so far in 2023 to about 4,370. Wren expects the gauge to climb to 4,700 by end-2024, but warns the market will see some volatility in the interim period.

While inflation has moderated, it's still double the Fed's 2% target - and that means the central bank won't be satisfied until price pressures ease further, he said.

"For us, that was a great CPI number, a little bit below expectations today and 4% for the year over a year. But let's face it, the Fed is not going to be satisfied with that. We think inflation will be below 3% by the end of the year."