The veteran market watcher is famous for his bearish disposition. Over the past two years, he’s been one of the key voices warning that the Federal Reserve’s rapid interest rate hikes will ultimately spark a U.S. recession. Even after the latest GDP estimate for the third quarter came in red-hot this week, Edwards remained cautious.

He believes that America’s small businesses are struggling with the rising cost of borrowing and persistent inflation and their problems will eventually come to the surface. And rising small-business bankruptcies will ultimately be the final nail in the coffin of the U.S. economy after years of headwinds and recession predictions. “The vast majority of economists are stampeding away from their recession calls,” he wrote in a Thursday note. “The notion that we are at the start of a new economic cycle seems preposterous to me.” Edwards laid out his reasoning, particularly emphasizing the role of the “Seven Fed Horsemen of the Apocalypse,” comparing the interest-rate hikes from Jerome Powell and his six fellow Federal Reserve board members to the New Testament’s destruction myth.

“You only need to turn your gaze to the smaller listed and unlisted companies to witness the torture being inflicted by the Fed’s interest rate garroting,” he wrote. 

The small-business recession that everyone is missing

Small businesses are critical to the health of the U.S. economy, as Edwards noted, with firms of fewer than 100 employees creating 63% of all new jobs between 1995 and 2021. Small businesses also currently account for roughly 43% of U.S. gross domestic product, according to the U.S. Chamber of Commerce. But with the availability of loans for small businesses falling, and the cost of the remaining loans rising, it’s been tough treading for mom-and-pop operations—especially when compared with their larger competitors. Small-business credit conditions are “at recession levels,” Edwards claimed.

The strain on smaller companies can be seen in the performance of U.S. stocks. The small-cap-focused Russell 2000 index has dropped over 6% year to date, while the S&P 500, which tracks the 500 largest U.S. firms by market cap, has risen roughly 8% over the same period. 

Even within the S&P 500, Big Tech companies have been the only real winners this year amid rising interest rates. “The S&P would in fact have been in negative territory without the stellar performance of the ‘Magnificent Seven’ megacaps,” Edwards explained, referring to the trendy new name for the largest Big Tech firms.

‘Trampled underfoot’

Edwards argued that the pain of small- and medium-size businesses hasn’t translated into rising unemployment yet, but that’s only because pandemic-era labor shortages left many firms playing catch-up on hiring. And many business leaders are more cautious about letting workers go after the extended labor shortage even as business conditions worsen, for fear of not being able to hire enough workers when things improve.

But Edwards warned: “Post-pandemic labor shortages (reflected in payroll resilience) should not disguise the fact that smaller companies are being trampled underfoot—not by the Magnificent Seven, but the Seven Fed Horsemen of the Apocalypse.”

He pointed to rising bankruptcies as evidence that the seven members of the Federal Reserve Board are in fact leading the economy toward a nightmare scenario. Between January and the end of September, there were 516 total corporate bankruptcies in the U.S., according to data from S&P Global. That’s 38% more than there were in all of 2022.

Edwards also believes that many smaller so-called zombie companies sustained their unprofitable business models using cheap debt during the era of near-zero interest rates that followed the Great Financial Crisis and the pandemic. These firms were essentially kept alive on “extended life support,” he argued. “But now the sharp rise in rates is causing a surge in bankruptcies beyond one’s worst Freddy Krueger nightmares.”

Some analysts and economists have pointed to AI as a potential savior for the economy and stock market this year, arguing it could increase productivity and reduce costs for businesses. And Edwards himself previously argued that the profit boost from greedflation may have helped delay a recession by enabling corporations to continue hiring. But on Thursday, the strategist warned that the corporate greedflation tailwind has faded, and that AI is unlikely to be as impactful as imagined.

“The simple fact is that the one-off fillip from ‘greedflation’ is over and excited AI EPS optimism may yet prove a pipe dream,” he wrote.

Overall, Edwards believes that the latest positive GDP and unemployment reports, as well as the stock market’s positive performance this year, are simply “disguising the depth of pain the Fed has inflicted on the economy, which will soon be obvious to all.”