A 12% correction is in store for the stock market by the end of the year, says Stifel

• Stifel warns of a sharp stock market correction by the end of the year, with the S&P 500 potentially down 12%.

• Chief equity strategist Barry Bannister said high valuations and speculative investor behavior were a concern.

• “Our tools tell us to expect an S&P 500 correction to the very low 5,000s by 4Q24,” Bannister said.

Investors should prepare for a sudden and rapid stock market correction before the end of the year, according to Stifel.

In a note on Thursday, Stifel’s chief equity strategist Barry Bannister warned that the S&P 500 could trade 12% lower in the fourth quarter.

“Our tools tell us to expect an S&P 500 correction to the very low 5,000 level by 4Q24,” Bannister said.

According to Bannister, there are a number of factors that give him cause for concern, including the idea that investors are exhibiting the kind of behavior that is present during bubbles and mania.

“Just as countries that go rogue become almost impossible to invest in, investors caught in the grip of speculative fever become almost impossible to analyze,” Bannister said.

First, Bannister is concerned about the stock market’s current valuations, which are approaching “a nearly three-generation high,” based on the S&P 500’s price-to-earnings multiple of about 24x.

Additionally, the outperformance of large-cap growth stocks relative to value stocks is nearing the same peak seen in February 2000 and August 2020, both of which served as warnings of an impending bear market.

On the labor front, while Bannister admits that increased labor supply through increased immigration has supported economic growth, with U.S. GDP growing at a pace above pre-pandemic trend levels, overall labor demand has fallen.

“The fall in demand for labor is now a symbol of the risk of recession,” Bannister said.

Bannister pointed out that the 6-month non-farm payrolls spread had just dipped below the “recession-triggering level.”

The diffusion index helps measure the magnitude of job gains or losses across all economic industries.

Turning to the November election, Bannister said the typical “pre-election juice” for the economy is likely to fade towards the end of the year as election promises on both sides of the aisle are withdrawn and the reality sets in that it is hard to last. significant legislation in what could be a divided government.

“The pre-election juice for the economy may taper off at the end of the year, causing (forward-looking) stocks to drop about 4 months ahead, which is 4Q24E,” Bannister explained.

The story continues

Finally, Bannister said many investors don’t appreciate the risks of a bubble in tech stocks, as happened during the dot-com craze nearly 25 years ago.

“It takes a generation to forget the perils of a bubble, and it’s Groundhog Day versus the tech bubble of the 1990s; in reality, “new technology” isn’t even “new” and the low equity risk premium seems to be stalling. an annual total return compounded over the next 10 years of the S&P 500, close to 3% real and 6% nominal,” Bannister said.

Read the original article on Business Insider