- Steifel strategists warned that a rapid correction could cause the S&P 500 index to fall by as much as 500 points.
- The investment firm said lower inflation was a “pipe dream” and that the Fed’s interest rate cuts could be delayed.
- The market expects only one or two rate cuts by the end of the year, according to the CME FedWatch tool.
Stifel analysts say the S&P 500 could be on the brink of a sharp decline because inflation is unlikely to cool further from here.
The investment firm predicted in a note that the S&P 500 index would fall to 4,750 in the second or third quarter of this year. This would represent a decline of about 10% from the benchmark index’s current level of around 5,222 as of Monday.
Strategists predicted that inflation is likely to remain high as the economy emerges from what they call a “quasi-recession” that began in early 2022 and lasted until mid-2023. This accounted for most of the disinflation. So far, economic activity has picked up.
“We have been wary of a deep correction in the S&P 500 index in mid-2024.While most strategists predicted a recession last year or were eager to call for the start of one next year, we The five quarters from Q1 2022 to Q2 2023 will be a ‘pseudo-recession,’ and the Fed has already recovered all of the normal post-recession disinflation that we expect.” is writing.
Inflation remains well above the Fed’s 2% target. Consumer prices rose 3.5% in March from a year earlier, marking the third consecutive month of higher-than-expected inflation.
Strategists said the reason for the price increase is still tough economic conditions, which may be driving prices higher. For example, employment activity remains strong, potentially stimulating wage growth and pushing up inflation.
“As a result, the Fed’s goal of sustained core PCE inflation of 2% is a pipe dream. Once interest rates normalize and core PCE rises to just over 3% in mid-2024, our model suggests that the Fed will postpone any rate cuts. “further triggering a mid-quarter stock market correction,” the strategist added.
Markets have already backed off on expectations that the Fed will cut interest rates this year, which led to a selloff in stocks in April. Fed officials have said they are looking for further evidence that inflation is returning to the 2% price target, and the CME FedWatch tool shows investors are currently looking for 1-2% by year-end. They say they are just hoping for another rate cut. At the beginning of 2024 he will have six.
Central bankers are largely expected to keep interest rates at current levels as traders await April inflation data to be released this week. Markets are pricing in a 96% chance that interest rates will remain flat at the Fed’s next policy meeting, and a 75% chance that rates will remain unchanged through the summer.
