One Strategist’s Bear Case Sees the S&P 500 Sinking Another 30%

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(Bloomberg) — US stocks could drop another 30% if spiking energy costs spark an economic contraction, according to Evercore ISI strategist Julian Emanuel.

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Emanuel revised his 2022 target for the S&P 500 index to 4,300 from 4,800 but also outlined a more bearish scenario where the gauge falls to 2,900 — a level last seen in 2020 in the early part of recovery from the pandemic rout. The US stock gauge closed near 4,115 Wednesday.

Higher oil prices “have a history of increasing the probability of a recession,” Evercore’s chief equity and quantitative strategist wrote in a note Wednesday, adding the average “recession bear market” in the past century is a slide of about 41%.

Stock market prognostication has rarely been so fraught, encompassing the highest inflation in a generation, sharp interest-rate hikes, war in Europe and China’s embrace of Covid lockdowns at great economic cost.

The S&P 500 is down almost 14% so far this year and a bounce that began in mid-May has fizzled as warnings about the economic outlook and shrinking corporate profit margins become ever more shrill.

“People are starting to worry about whether we are going to see some more lowering of guidance before the earnings season starts in July and then maybe even further once it starts,” Matt Maley, chief market strategist at Miller Tabak + Co., said on Bloomberg Television. “People are definitely getting more defensive again.”

Emanuel has a bullish scenario of 4,800 if investors get some relief from price pressures — a big if given that US inflation is expected to stay above 8% in a report due Friday.

Technical indicators, meanwhile, show a bearish bias, according to Katie Stockton of Fairlead Strategies. “The relief rally has done nothing to improve long-term downside momentum behind the major indices,” she wrote in a note.

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