The S&P 500 is in for a 5% drop, according to CFRA’s Sam Stovall, a veteran strategist who is warning of a bearish backdrop for stocks. Stovall predicts that the market could see its first “crack on the ice” in the tech sector, signaling potential trouble ahead for investors.
Stovall pointed to several factors that could contribute to the impending correction. Despite the strong performance of stocks so far this year, with the S&P 500 up 15% in 2024, Stovall believes that interest rates, inflation, and stock valuations are setting the stage for a downturn.
Inflation, while declining, remains above the Federal Reserve’s 2% target, leading to projections of just one rate cut by the end of the year. Additionally, the inversion of the 2-10 Treasury yield curve, a historical indicator of an impending recession, has economists concerned about the future of the economy.
Stock valuations are also a cause for concern, with the S&P 500 trading at a 32% premium compared to its average price-to-earnings ratio over the last 20 years. Tech stocks, in particular, are trading at a 68% premium, indicating potential overvaluation in the sector.
Stovall warned that the tech sector, which has been a major driver of market performance in recent years, could be the first to show signs of weakness. He compared the current market situation to a jumbo jet flying on one engine, questioning how long it can stay aloft.
Other forecasters have echoed Stovall’s concerns, with elite investor John Hussman warning that the stock market is the most overvalued since 1929, potentially leading to a significant correction in the near future.
As investors brace for a potential downturn, it will be crucial to monitor market developments closely and consider adjusting investment strategies to mitigate risks in the current market environment.
