- Bitcoin’s 10% sell-off since June 7 signals a warning for the broader stock market.
- Stifel strategist Barry Bannister noted the strong correlation between Bitcoin and the Nasdaq 100 Index.
- Bannister said he expects stocks to correct over the summer due to the effects of a prolonged period of higher interest rates.
Bitcoin’s 10% sell-off since June 7 is sending warning signs to the broader stock market, according to Stifel strategist Barry Bannister.
In his Wednesday note, Bannister highlighted Bitcoin’s strong correlation with the Nasdaq 100 since 2020, as the cryptocurrency shares characteristics as a speculative risk-on asset rather than a “digital gold.”
But while Bitcoin has fallen to around $65,000 in June, the broader stock market continues to hit new highs, led by gains in mega-cap tech stocks such as Nvidia and Apple.
Bitcoin’s failure to reach new highs suggests stock prices will likely fall in tandem with the cryptocurrency, with stock prices likely catching up, according to the note.
“Bitcoin’s recent weakness signals that a summer correction and consolidation phase for the S&P 500 is imminent,” Bannister said.
Bannister is not the only Wall Street analyst taking stock market cues from Bitcoin.
Katie Stockton, founder of Fairlead Strategies, told CNBC on Monday that she too has been tracking the widening divergence between U.S. tech stocks and Bitcoin.
“When you see bitcoin retreating in that framework and the Nasdaq-100 index rising, it does concern us to some degree in the short term,” Stockton said. “As soon as people start to say, ‘Wait a minute, maybe Nvidia’s gone a little too far,’ we feel that this divergence will eventually catch up with the Nasdaq-100 index.”
One reason Bannister believes a stock market sell-off is imminent is the Federal Reserve’s likelihood of keeping interest rates higher for longer to combat still-high inflation.
“We expect a correction in risk assets as the Fed shifts from its current cautious dovish stance amid persistently elevated inflation (the ‘last mile’ issue) and the S&P 500 becomes clear as it is overvalued relative to the Financial Conditions Index and other measures,” Bannister said.
Bannister expects high-flying big tech stocks like Nvidia to be hit hardest in a summer correction scenario, as analysts’ future earnings estimates show signs of peaking.
“NVDA follows past cycles, so the leaders on the upside could lead a correction in 3Q24 on the downside,” Bannister said.
But Bannister acknowledged that it may be premature to call a market correction, as bubbles often take on a life of their own.
The stock price could continue to rise before experiencing another large decline of around 20%.
“Looking at past bubbles since the 19th century, the S&P 500 could rise to around 6,000 by the end of 2024 and then fall back to near early 2024 levels (around 4,800) by the first quarter of 2026, five quarters later,” Bannister said.
