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Stock market correction occurs amid trio of bearish factors: strategist
- The S&P 500 is expected to decline 5%, according to Sam Stovall of CFRA.
- The veteran strategist warned of a veteran backdrop for stocks.
- The market could see its first “crack on the ice” in the technology sector, he warned.
The stock market is poised for a correction as a trio of headwinds weigh on stock prices, according to Sam Stovall, chief investment strategist at CFRA Research.
The Wall Street veteran highlighted the strong performance of stocks so far this year, with the S&P 500 up 15% in 2024. However, the benchmark index is on track to fall 5%, a- he predicts, thanks to the bearish configuration of interest rates. inflation and stock market valuations.
Inflation is falling but remains above the Federal Reserve's 2% target, leading central bankers to expect just one rate cut by the end of the year.
Higher Rates Triggered Longest Ever Treasury Inversion 2-10 yield curve, the bond market's famous indicator of a coming recession. The indicator, which flashes when the 2-year yield rises above the 10-year yield, has been a reliable recession signal throughout history, and economists have said this time around it probably won't be different.
Stock market valuations are also high by historical standards, suggesting a future decline. The S&P 500 carries a 32% premium over its average price-to-earnings ratio over the past 20 years, Stovall noted. Tech stocks, which have dominated the market in recent years, trade at a 68% premium.
“I think we're really at the end of our rope and we've had to see upward revisions to earnings estimates, I think, to justify that,” Stovall said in a recent interview with CNBC.
Stocks could see their first “crack in the ice” in the tech sector, he added, pointing to the high valuations of large-cap tech stocks.
“It's just the technology that has outperformed the market. I kind of feel like this is a jumbo jet that flies with one engine, and you wonder how long it will last will stay in the air,” he warned.
Other forecasters have warned of limited market upside as stocks, particularly technology stocks, continue to climb. According to one valuation indicator, the stock market appears to be the most overvalued since 1929, which could pave the way for a strong correctionwarned elite investor John Hussman.
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