The S&P 500 could slide another 33% in a ’70s-style inflation environment: Société Générale

The bear market in equities is likely not over — and could have a lot longer to run if the economy falls into a 1970s-style stagflation scenario, a Wall Street equity strategist warned this week.

The S&P 500 officially entered a bear market last week, falling more than 20% from its January 3 high. The U.S. equity benchmark is on track for a historically lousy half-year performance as markets expect tighter monetary policy to rein in inflation but fear interest rates could hit lows. levels likely to cause a recession.

“We have been and remain in a ‘risk reduction, defensive and downgrade’ mindset for 2022 as Fed hikes in the current downturn are expected to create collateral damage, leading us to take a bearish stance on U.S. consumer, financials and small business caps,” Manish Kabra, Societe Generale’s head of U.S. equities, said in a Tuesday note. “But the ongoing fight against inflation is likely to trigger a domino effect, with housing and credit markets looking like the next dominoes to fall.”

If the Fed fails to rein in prices, a 1970s-style inflationary shock followed by a recession could push the S&P 500 SPX,
-0.13%
down another 33% from its current level to trade at 2,525, Kabra said.

The S&P 500 drops an average of 33% in a typical recession, but “the current 24% decline in stocks suggests that we have discounted 72% of an average recession (i.e., a probability recession of 72% is integrated)”, according to the Company. Report of the General. “At 3,200, the S&P 500 will fully discount a typical recession.”

The S&P drops an average of 33% during a typical recession, and the current 24% drop suggests a 72% probability of a recession is priced in, according to SocGen. SOURCE: FACTSET, BLOOMBERG, REFINITIV, SG CROSS ASSET RESEARCH/US EQUITY STRATEGY

The S&P 500 fell 0.1% near 3,762 on Wednesday night after Federal Reserve Chairman Jerome Powell confirmed his plan to fight inflation and said the US economy could withstand strong rate hikes. The Dow Jones Industrial Average DJIA,
-0.15%
was stable near 30,530.

Read more: Dow and S&P 500 climb after Powell says Fed isn’t trying to trigger recession with higher interest rates

“We continue to see the fair value of the S&P 500 at 3,850 and reaching 5,000 by 2024 when the inflationary shock should have subsided, the Fed is likely not only to have completed its hike, but also to have started a rate cut cycle and the US 10-year return TMUBMUSD10Y,
3.162%
is closer to 2% again,” Kabra wrote in the report.

The 10-year US Treasury yield TMUBMUSD10Y,
3.162%
rating fell 14 basis points to 3.16% on Wednesday. Treasury yields move opposite to price.

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Stagnant 1970s-style growth + lower multiples = S&P 500 at 2525. SOURCE: FACTSET, BLOOMBERG, REFINITIV, SG CROSS ASSET RESEARCH/US EQUITY STRATEGY

Consumers will continue to feel the impact of rising prices for another year amid negative wage growth, as retail gasoline prices hit all-time highs and mortgage rates bottomed out. highest level since 2008.

Read more: ‘The savings and income needed to qualify for a home loan have skyrocketed’: 5 ways the housing market has left buyers in the dust – and counting

“The main reason for our bearish attitude towards the US consumer is the negative growth in real wages over the past four quarters,” Kabra said. “Furthermore, real wages are unlikely to be positive until the summer of next year.”

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