Investec equity strategist Roger Lee said stocks could suffer if the U.S. economy avoids what many believe is an imminent recession. Lee said the market is bracing for a recession next year, which he called the “most widely predicted recession in history.” Many economists expect a U.S. recession – albeit a mild one – with HSBC saying a slump in the fourth quarter would be followed by a “year of economic contraction”. But Lee, a London-based equity strategist, said that looked more like speculation than fact, as hard data such as the job market data painted a picture of a much healthier U.S. economy. He said economic forecasters were using “soft” data, such as surveys of purchasing managers, which suggested a drop in business activity. “In contrast, ‘hard’ data such as labor market data do not suggest that the U.S. is in recession at all,” Investec’s Lee said in response to a CNBC Pro survey of 15 strategists. In fact, the ADP employment data released last week shattered expectations. The private sector added 497,000 jobs in June, well above the Dow Jones consensus estimate of 220,000. It also reversed last month’s decline. So, paradoxically, the biggest risk to U.S. markets is whether recession risks recede. Roger Lee Lee, head of UK equities at Investec, said the discrepancy between expectations and actual data could have “profound implications for equities”. A failure to materialize a recession could lead to “higher and more persistent inflation than investors currently expect,” he added. He said the current “break-even ratio” – the difference between the yield on inflation-linked debt and nominal debt – mispriced inflation. “The two-year break-even rate in the U.S. is just over 2 percent right now. If inflation is projected to average 2 percent over the next two years — and U.S. inflation is currently over 4 percent — then at some point, arithmetically, inflation will Might need to go down to zero. That seems highly unlikely,” Lee explained. That could lead to a downturn in the stock and bond markets, the strategist said. “If break-even rates need to rise significantly, that will have a big impact on U.S. Treasury yields — pushing yields higher,” Lee said. When yields rise, bond prices fall. Immediately after Thursday’s jobs data, the 2-year Treasury yield hit 5.12%, a level not seen in 16 years. How has the stock market been affected? “Rising U.S. Treasury yields will put significant valuation pressure on highly valued stocks, as we see in 2022,” Lee said. “So if a U.S. recession never materializes and inflation is on the rise remain high for an extended period of time, we expect prices of high-value stocks (such as growth stocks) to fall, while prices of low-value stocks (‘value’ or cyclical stocks) to rise.” “Thus, paradoxically, The biggest risk to the U.S. market is that recession risks recede,” Lee added. But it’s not all bad news. Lee expects the UK market, dominated by “value” or cyclical stocks, to benefit. He also expects so-called value stocks such as banks, mining and oil companies to recover if the U.S. avoids a recession. In such a scenario, the Investec strategist said he could see the S&P 500 falling and the FTSE 100 rising, similar to what happens in 2022. — CNBC’s Jeff Cox contributed to this report