A famed recession indicator is flashing red even as financial markets price in zero chance of a downturn in the coming year, economist says

• A handful of indicators suggest a hard landing is on the way, top economist David Rosenberg warned.
• A famed recession indicator in the job market is flashing levels similar to the last three downturns.
• But those may be lost on investors, who are still feeling bullish on stocks and the economy.

The economy is flashing a handful of warning signs that a recession could be on its way even if investors betting on a continued stock market rally don't believe it, according to top economist David Rosenberg.

The Rosenberg Research founder pointed to several warning signs the US could be on the precipice of a downturn, despite the economy looking strong on the surface. In particular, he pointed to the Sahm Rule — a famous recession indicator that flashes when the three-month moving average of the US unemployment rate climbs 50 basis points from a 12-month low.

When triggered, the Sahm Rule has historically been a highly accurate indicator that the economy is in the early stages of a recession. According to its creator and former Fed economist, Claudia Sahm, her rule has correctly called every recession since the 1970s, and while it's not showing the economy is in a recession yet, it's just 20 basis points away from doing so, according to the latest jobs data. 

That level is similar to what the Sahm Rule was showing prior to the 2001, 2008, and 2020 recessions, Rosenberg noted. 

"The various leading recession indicators are stubbornly hanging onto the view that recession is highly likely in the coming year. Yet, based on our quantitative analysis, the equity market and investment grade and high yield corporate credit space are priced for 0% odds," Rosenberg said in a note on Monday. "Delayed is not derailed," he added of a recession. 

Rosenberg pointed to other under-the-radar recession warnings. Near-term Treasury yields are pricing in a near-100% chance of recession over the next 12 months, he noted, citing data from the Fed and Haver Analytics.

The yield curve, another notorious recession indicator in the bond market, is pricing in around a 60% chance of recession.

But those risks look lost on investors, who have warmed up to the possibility of a soft-landing as stocks continue to climb and the Fed looks poised to cut interest rates later this year. 47% of investors feel bullish on stocks over the next six months, according to the AAII's latest Investor Sentiment Survey. Meanwhile, markets are pricing in a 49% chance the Fed's first rate cut could come as soon as June, according to the CME FedWatch tool.

Rosenberg is among Wall Street's most bearish forecasters this year, and has been calling for a recession for months. Recently, he said a recession was now four times more likely than an economic expansion. That's due to a slew "underrated" indicators that show the economy is weaker than it looks on the surface, which suggest that stocks are at risk of a 39% crash, he predicted.