Analysts from Stifel recently said they expect that the S&P 500 is close to a sharp decline, based on the fact that inflation still isn’t cooling a lot.
In a recent note the investment firm sent out, analysts predicted that the stock index would drop to about 4,750 in either the second quarter or third quarter this year. This would represent a decline of about 10% from where its levels sat on Monday — at 5,222
The analysts predicted that inflation is very likely to remain high, even as the U.S. economy is making its way out of what they called a “pseudo-recession” that lasted from early in 2022 to the middle of last year. According to Stifel, that time period accounted for the large amount of disinflation that’s occurred, with economic activity in the country starting to rev up.
In the note, the firm wrote:
“We have been wary of a broad S&P 500 correction in the middle quarters of 2024. While most strategists were expecting a recession last year or eagerly attempting to call the start of one in the next year, we have been of the view that the ~5 quarters 1Q22 to 2Q23 were a ‘pseudo-recession’ and the Fed has already harvested all the normal post-recession disinflation we would expect.”
Despite a lot of hard work by the Fed over the last 18 months or so, inflation is still a lot higher than the 2% target rate. In March, consumer prices increased 3.5% year-over-year, which represents the third month in a row that inflation rose at a higher-than-expected rate.
A lot of the spikes in prices could be attributable to the economy still being hot, which the strategists said is stoking growth in prices. For example, hiring activity is still robust, which often leads to wage growth, which often leads to inflation rising.
As the strategists explained:
“As a result, the sustained 2% Core PCE inflation the Fed seeks is a pipe dream. With rates normalized and the mid-2024 pop in Core PCE to just over 3% that our models indicate we expect Fed rate cuts to be pushed back further, causing a middle quarters correction for equities.”
Earlier this year, Fed officials announced that they were likely to cut interest rates a few times in 2024. Those lofty expectations were tampered only a few months later, when Fed Chair Jerome Powell said that only one rate cut was expected in 2024, and that wouldn’t come until later in the year.
Central bank officials said they need to see inflation dropping closer to the 2% target before they would think about cutting interest rates.
That announcement led to a huge sell-off of stocks that happened in April.
But, with the economy still remaining hot and inflation still remaining high, it’s possible that rates might not be cut at all this year.
A lot will be riding on the April inflation data, which will be released this week.
