The S&P 500 is poised for a significant downturn as inflationary pressures persist, Stifel analysts caution. Their recent analysis forecasts a descent to 4,750 in either the second or third quarter of the year, reflecting an approximate 10% drop from the current index level of 5,222.
Persistent high inflation is expected, despite the economy emerging from a period dubbed a "pseudo-recession," which spanned from early 2022 to mid-2023. This phase was primarily responsible for the moderate disinflation observed thus far. However, economic activities have intensified since, diminishing hopes for further cooling of inflation.
Stifel’s team has consistently expressed concerns about a potential broad correction in the S&P 500 during the mid-2024 quarters. While other strategists anticipated a recession last year or were keen to predict one soon, Stifel noted that the previous five quarters were characterized more as a "pseudo-recession." They believe the Federal Reserve has already capitalized on the typical disinflation expected post-recession.
Inflation continues to exceed the Federal Reserve's target of 2%. In March, consumer prices rose by 3.5% year-over-year, marking the third consecutive month where inflation exceeded forecasts. This sustained high inflation can be attributed to robust economic conditions that fuel price increases. For example, strong hiring trends are likely to accelerate wage inflation.
Consequently, achieving the Federal Reserve’s goal of sustaining 2% core PCE inflation appears increasingly unattainable. With interest rates normalized and projections showing core PCE inflation rising just over 3% by mid-2024, it is anticipated that the Federal Reserve will delay any rate cuts, potentially triggering a mid-year correction in equity markets.
Market sentiment has adjusted to a less aggressive stance on Federal rate cuts for the year, evidenced by the significant sell-off in stocks observed in April. Fed officials are seeking more proof that inflation is reverting to their 2% target. Current expectations, based on the CME FedWatch tool, suggest only one or two rate cuts by the year's end, a stark reduction from the six anticipated at the beginning of 2024.
As April's inflation data is due imminently, traders are on high alert, though the consensus among central bankers points to maintaining current interest rates. The market has priced in a 96% likelihood that rates will remain unchanged at the upcoming Federal policy meeting, with a 75% probability of rates holding steady throughout the summer.
