S&P 500 has biggest decline in half a year; can you see the bear tracks?

The U.S. stock market is facing its biggest decline since fall 2023, amid higher-than-estimated inflation that has dampened expectations of a near-term rate cut by the Federal Reserve, as well as intensifying tensions in the Middle East.

At the end of last week, the S&P 500 index was down 5.5% compared to the all-time high in March, after a vigorous 27% rise that began in October-November last year, while for the Nasdaq Composite, of companies operating in knowledge-intensive fields, the decline was 7% from the record earlier this month.

The Consumer Price Index in the United States rose in March by 3.5% on an annual basis, both above February's level of 3.2% and above the estimates of economists polled by Dow Jones, of 3.4%. The index also beat expectations for both monthly growth and core inflation (which excludes energy and food prices), according to CNBC.

Under these conditions, economists have reduced their estimates to just two interest rate cuts by the Federal Reserve this year, with the first expected in September. Moreover, some Wall Street analysts believe the U.S. central bank may not cut interest rates at all in 2024, down from six cuts expected at the start of the year, according to Reuters.

Now, the question on investors' minds is whether the prospect of the Federal Reserve keeping interest rates high for longer and rising tensions in the Middle East can halt the US market's sustained upward trajectory of late and turn the current decline into -a lasting "bear" market, generically defined by a decline of at least 20% from a recent high.

• How do big names on Wall Street interpret the latest inflation report?

Tom Lee, the head of the research department of the market analysis and strategies firm Fundstrat says that, analyzed in depth, the data related to inflation actually shows a progress of disinflation (no deceleration of price growth), according to Business Insider.

"Believe it or not, the last CPI (Consumer Price Index) report was actually very good," Lee said days after the data was released on April 10, noting that many components of the index are returning to trend. long-term.

"The forces of disinflation are really strong, because we had the highest percentage of components (n.r. of the index) whose inflation was below 3% in annual dynamics. In other words, there are more and more elements that are approaching the trend," explained the strategist.

In addition, Lee pointed out that the main driver of inflation in March was the higher price of auto insurance, which actually reflects the increase in prices in the auto industry during the pandemic. "This higher level of the CPI was due, almost exclusively, to car insurance. Or, this tells us that it is only a timing problem, not a structural one," said the strategist, quoted by Business Insider.

In the view of the Edward Jones Investments team, recent reports on inflation in the United States do not show any element to suggest that certain disinflationary trends have ended and inflation has rekindled in a significant or sustained way. "In fact, the latest reports on the labor market, which show a tendency to relax salary earnings, support this point of view", wrote Mona Mahajan, investment strategist at Edward Jones Investments, in his latest weekly analysis.

• George Ball, Sanders Morris Investment: "Currently, investors are much more aware of geopolitical risks in decision-making"

According to general opinion on Wall Street, the long-term upward trajectory of the stock market will not be derailed by the adjustment of expectations for Fed actions or tensions in the Middle East, but there are elements that may sharpen the current decline and bring more price volatility.

In essence, the markets' still subdued reaction to events in the Middle East shows that investors realized that Israel's response to Iran's attack was in a manner that would minimize the escalation of the conflict. "However, today investors are much more aware of geopolitical risks in decision-making," said George Ball, president of Sanders Morris Investment, quoted by CNBC.

On the other hand, although the impact of geopolitical tensions is difficult to quantify, they tend to manifest primarily in commodity markets, especially in the oil market in the case of the conflict in the Middle East, believes Mona Mahajan from Edward Jones Investment.

• The S&P 500 may reach 5,700 points by the end of the year, 15% above the current level, believes Tom Lee from Fundstrat

Tom Lee, one of the optimists on Wall Street, estimates that the S&P 500 may reach 5,700 points by the end of the year, which is equivalent to an increase of almost 15% from the level of the index at the end of last week, of 4,967 points.

"The market doesn't need interest rate cuts from the Fed to do well," the strategist said in a recent CNBC interview, assuming the U.S. economy will remain robust and inflation will continue to fall. "The economy seems to meet the conditions, so far," Lee pointed out.

S&P 500 companies' profits are on track to report growth of at least 7% for the first quarter of the year, according to FactSet data. The economy also remained robust, with growth expected to grow by 2.9% in the first three months of the year, according to estimates from the Atlanta Fed, writes Business Insider.

"We don't need the Federal Reserve to cut interest rates three times," Lee said. In his view, the sure risk for the stock market is that inflation will prove much higher than expected, so that the Fed will operate another interest rate hike. "It would be the scenario that would shake the markets the most", said the strategist, adding that, however, this would be a "tail scenario" a normal distribution).

• James Demmert, Main Street Research: "We have entered a new bull market, driven by the power of artificial intelligence"

James Demmert, chief investment officer of Main Street Research, says a market decline has been looming for some time, with the S&P 500's 8-10% retreat in six months.

In his view, the decline now was triggered by tensions in the Middle East, rising bond yields and the Fed's delayed rate cut. The magnitude of the decline will depend on how tense the situation in the Middle East becomes, but this cannot derail the market's long-term uptrend.

"Even if the news is scary right now, we believe we have entered a new bull market driven by the power of artificial intelligence. This may take another 7-9 years, as AI is expected to generate significant productivity gains for companies across the board, which will strengthen corporate profits," Demmert said, as quoted by Business Insider.

• Goldman Sachs strategists predict S&P 500 could reach 6,000 points this year

John Flood, head of US equity sales and trading at Goldman Sachs, believes the conditions are in place for stocks to continue their rally through the end of the year, according to Insider. Among the elements that will support the appreciation, Flood mentions the historical evolution of the market after the end of the tax season (which this year was April 15), higher share buybacks by companies and investor confidence reflected by inflows into money market funds.

"There's still plenty of liquidity," Flood said, pointing to $1.6 trillion in inflows into money market funds starting in 2023, money that investors can put into stocks.

Also, current market sentiment is not yet at wildly bullish levels, a promising sign that a massive pullback is not imminent, Flood added. In another report, strategists at Goldman pointed out that stocks could still rise this year, pointing to a target of up to 6,000 points for the S&P 500 index, thanks to the "exceptionalism" of the big names in technology, according to Business Insider.

• Mona Mahajan, Edward Jones Investments: "Bear markets tend to occur when the Fed raises interest rates"

Edward Jones Investments' Mona Mahajan points out that, given the more than 25% rise the S&P 500 has posted since last fall, a period of consolidation and profit-taking was expected.

"We are yet to see the recent correction turn into a deep and prolonged bear market (with declines of over 20% in many sectors), mainly for two reasons:

-First, bear markets tend to occur when the economy is in or entering a recession. However, at the moment we do not see these conditions. In reality, the economy continues to remain robust, and the latest figures for US retail sales still show a healthy consumer.

-Second, bear markets tend to occur when the Fed raises interest rates. In our view, while inflation has proven persistent, we do not yet see the conditions necessary for it to reignite in a sustainable way. We believe the Fed will be patient and its next move will likely be a rate cut," the investment strategist wrote in his latest weekly report.

• Anthony Saglimbene, Ameriprise Financial: "The lack of positive growth prospects for companies can be the factor that puts pressure on stocks"

This week's financial reports from some of the biggest technology companies, including the "magnificent" Tesla, Meta Platforms (Facebook), Alphabet (Google) and Microsoft, may represent an important test of the market's upward trend, according to Reuters.

"From a psychological point of view, results above or below expectations are important," said David Katz, chief investment officer at Matrix Asset Advisors. "There's a lot of good news built into the price of many of these companies."

Six of the Big Seven, excluding Tesla, are expected to see collective profits rise 42.1% in the first quarter, UBS strategists said in an April 8 filing. Overall, earnings at S&P 500 companies are expected to rise 0.9% in the first quarter, according to FactSet data.

"In an environment with a lot of uncertainty regarding Fed policy and heightened geopolitical tensions, the lack of a positive, growth outlook for companies may be the factor that puts pressure on stocks," said Anthony Saglimbene, chief market strategist at Ameriprise Financial , quoted by Reuters.

And Mona Mahajan points to reports of big tech names that she says are in higher-volatility sectors that tend to fall more during market downturns. "On the other hand, the announcement of solid financial results and favorable estimates can give a positive boost to technology-based sectors and the market as a whole," wrote the strategist at Edward Jones Investments in his latest weekly report.