-
Stifel warns of a sharp correction in the stock market by the end of the year, with the S&P 500 possibly falling by 12%.
-
According to Barry Bannister, chief equity strategist, high valuations and speculative investor behavior are worrying.
-
“Our tools tell us we can expect a correction of the S&P 500 to a very low level of 5,000 by the fourth quarter of 2024,” Bannister said.
According to Stifel, investors should prepare for a sharp and rapid correction in the stock market before the end of the year.
In a note on Thursday, Barry Bannister, chief equity strategist at Stifel, warned that the S&P 500 could fall as much as 12% in the fourth quarter.
“Our tools tell us we can expect a correction of the S&P 500 to a very low level of 5,000 by the fourth quarter of 2024,” Bannister said.
Bannister says there are a number of factors that concern him, including the idea that investors are behaving as they did during bubbles and manias.
“Just as countries that become rebellious become almost uninvestable, investors caught up in a speculative fever become almost unanalyzable,” Bannister said.
First, Bannister is concerned about current stock market valuations, which are approaching a “nearly three-generation high” based on the S&P 500’s price-to-earnings ratio of about 24x.
Moreover, the strong outperformance of large-cap growth stocks relative to value stocks is approaching the same peak seen in February 2000 and August 2020, both of which served as warnings of an approaching bear market.
On the labor front, Bannister acknowledges that the rising labor supply from increased immigration has boosted economic growth, with U.S. GDP expanding faster than before the pandemic. However, overall labor demand has declined.
“The decline in labor demand is now a symbol of recession risk,” Bannister said.
Bannister pointed out that the 6-month nonfarm employment diffusion index has just fallen below a “recession trigger level.”
The diffusion index allows you to measure the magnitude of employment growth or loss across economic sectors.
Bannister said of the November election that the typical economic “pre-election energy” is likely to wane toward the end of the year as campaign promises from both parties wane and the reality is that it will be difficult to pass major legislation in what could be a divided government.
“Economic growth leading up to the election could slow toward the end of the year, causing stock prices (which anticipate the future) to fall about four months in advance, which is in the fourth quarter of 2024,” Bannister said.
Finally, Bannister said many investors don’t realize the risks of a technology stock bubble similar to what happened during the dot-com craze nearly 25 years ago.
“It takes a generation to forget the dangers of a bubble. It’s Groundhog Day compared to the technology bubble of the 1990s. In reality, ‘new technology’ is not ‘new’ at all and the current low Equity Risk Premium seems to us to lock in a weak compound annual real total return for the S&P 500 over the next 10 years, close to 3% real and 6% nominal,” Bannister said.
Read the original article on Business Insider
