The S&P 500 could fall by around 500 points in the event of a rapid correction, Stifel strategists warned.
The investment firm said falling inflation was a “pipe dream” and the Fed’s rate cuts could be delayed.
Markets are only pricing in one or two rate cuts by the end of the year, according to the CME FedWatch tool.
The S&P 500 could be poised for a sharp fall as inflation won’t cool down much further from here on, according to Stifel analysts.
In a note, the investment firm predicted that the S&P 500 index would fall to 4,750 in the second or third quarter of this year. This implies a decline of around 10% from the current levels of the benchmark index, which is around 5,222 on Monday.
Inflation is likely to remain stubbornly high, strategists predict, as the economy emerges from what they described as a “pseudo-recession” that took place in early 2022 and lasted until mid-2023. That explains most of the disinflation. observed so far, and economic activity has since resumed.
“We are wary of a broad correction in the S&P 500 in the mid-quarters of 2024. While most strategists expected a recession last year or eagerly tried to predict its onset next year, “We believe that the ~The five quarters from 1Q22 to 2Q23 were a ‘pseudo-recession’ and the Fed has already reaped all the normal post-recession disinflation we expected,” the firm wrote.
Inflation still remains well above the Fed’s 2% target. Consumer prices have increased 3.5% per year in Marchthe third consecutive month of higher-than-expected inflation.
According to strategists, the rise in prices could be attributed to a still dynamic economy, which is fueling price growth. Recruitment activity, for example, remains robustwhich can fuel wage growth and therefore increase inflation.
“As a result, the sustained 2% Core PCE inflation sought by Feed is a pipe dream. With rates normalized and Core PCE rising to just over 3% by mid-2024, our models indicate that we are expect Fed rate cuts to be pushed back further, causing stocks to correct mid-quarter,” the strategists added.
The markets have already recalled their outlook for Fed rate cut this year, leading to a stock sale in April. Fed officials said they were looking for more evidence that inflation was falling toward its 2% price target, and investors now expect one or two rate cuts by the end of the year. year, according to the Fed. CME FedWatch Toolcompared to six at the start of 2024.
Traders are awaiting the release of April inflation data this week, but central bankers are largely expected to keep interest rates at their current levels. Markets have priced in a 96% chance that rates will be kept level at the next Fed policy meeting, and a 75% chance that rates will stay the same through the summer.
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