A recession could still hit the economy and derail the stock market this year as fiscal tailwinds from 2023 turn into headwinds, top economist David Rosenberg warns

• A recession could derail the stock market in 2024 as investors look for a "soft landing", according to economist David Rosenberg.
• Rosenberg said the strong fiscal stimulus that helped propel the economy higher in 2023 will be a headwind this year.
• "I think it's premature to throw in the recession towel like so many others have [just] because it hasn't happened yet," Rosenberg warned.

As most investors turn their focus to a potential soft-landing in the US economy, top economist David Rosenberg is worrying about a recession in 2024.

Rosenberg warned on Wednesday that such a recession could materialize this year and derail the stock market as investors are caught flat-footed just like they were in 2007 and 2000.

"I think it's premature to throw in the recession towel like so many others have [just] because it hasn't happened yet," Rosenberg told CNBC.

"People who have said that the recession hasn't happened yet therefore it's not going to happen at all is like me sitting in my office in Toronto and saying it didn't snow in December in Toronto, Canada so winter has been called off. Everybody did the same thing in 2007," Rosenberg said.

A big reason why the economy remained resilient in 2023 despite aggressive interest rate hikes from the Federal Reserve is fiscal stimulus, and that tailwind is set to turn into a headwind this year, according to Rosenberg.

"Fiscal policy last year added more than 4 percentage points to nominal GDP growth which was just over 6%, so two-thirds of the growth last year in the economy came from the juice from fiscal policy and that acted as a huge antidote to what the Fed was doing," Rosenberg said.

Some of the fiscal stimulus from the government includes spending related to the CHIPS Act and reshoring efforts to drive growth in US manufacturing.

In 2024, Rosenberg expects the fiscal stimulus of 2023 to turn into "fiscal drag" that will reduce economic growth by 1.2 percentage points. That means the typical "election effect" in the stock market, in which the re-election year of a first-term President typically coincides with strong stock market gains, isn't going to happen this year, according to Rosenberg.

"In election years, the fiscal stimulus pumped into the economy averages out to be roughly a one percent GDP boost. Not so much for 2024, and the problem for the Democrats is that they don't control Congress and the GOP is hardly going to want to play ball," Rosenberg told clients in a note on Wednesday.

A lack of fiscal stimulus, combined with the ongoing lag effects of the Fed's tightening making its way through the economy, should result in a tough economy in 2024 that could ultimately slip into a recession, according to Rosenberg.