The S&P 500 is widely regarded as the benchmark bellwether for the wider US economy. And its future trajectory is far from certain.
The S&P 500 hit an at-the-time record 3,378 points in mid-February 2020, before the pandemic-induced mini-crash saw it crater to 2,305 points in a little over a month.
But encouraged by the twin supports of ultra-loose monetary policy and the US government’s pandemic packages, the index soared to a new record intra-day high of 4,819 points by 4 January this year.
Since then, a toxic cocktail of global developments has overtaken the index’s buoyancy, sending it careening by 121.7% down to a bear market 3,771 points.
S&P 500 futures: bear case
The bear case began in November and has only strengthened since. First came the Omicron variant, panicking investors that the pandemic would return into overdrive.
Then just as this fear receded, Russia launched its war in Ukraine in late February, further damaging an already weakened supply chain. Multiple commodities soared to record highs; oil, gas, wheat, nickel, platinum, and palladium included. At one point, Brent Crude was trading over $140, double its $70 average of 2021.
Then in early April, China’s Communist Party placed vast swathes of the country into strict lockdown over the resurgent pandemic. The most devastating impact was in Shanghai, the largest port in the world, crippling the already vulnerable global supply chain.
In the background, the Federal Reserve’s ultra-low interest rate policy and record $9 trillion balance sheet combined with the US government’s multi-trillion-dollar pandemic relief packages to prop up the S&P 500 to unearned new heights. Most recently, the Bureau of Labor Statistics has reported that 372,000 jobs were added in June, leaving unemployment at a meagre 3.6%.
But as any economist knows, the piper always comes knocking eventually.
S&P 500: overcorrection?
With CPI inflation at an unprecedented 9.1%, the Conference Board Consumer Confidence Index has fallen to 98.7, its lowest level since February 2021. Meanwhile, home sales have fallen for three consecutive months, elevating fears of a real estate bubble.
Forced to act, the Federal Reserve increased interest rates by 75 basis points in June, the largest hike since 1994. The federal-funds rate now stands at between 1.5% and 1.75%, and is widely expected to increase to at least 3% this year.
Chair Jerome Powell has sternly warned that ‘inflation can’t go down until it flattens out. That’s what we’re looking to see.’ And he’s noted that unemployment could rise to 4.1%, saying ‘we never seek to put people out of work…you really cannot have the kind of labor market we want without price stability.’
But high inflation, rising interest rates, and a stressed supply chain mean a severe recession appears almost inevitable. Goldman Sachs puts the risk at 30% over the next year, arguing ‘the monetary and fiscal policy response might be more limited than usual because policy rates remain close to their effective lower bound while both central bank balance sheets and government debt levels are very large by historical standards.’
The banks’ former CEO Lloyd Blankfein believes there is a ‘very, very high risk’ of a recession, while chief US equity strategist David Kostin predicts the S&P 500 could fall another 11% to 18% based on historical data.
Guggenheim CIO Scott Minerd thinks the US is in for a ‘summer of pain,’ and Deutsche Bank US equity and global strategist, Binky Chadha, thinks the S&P 500 could fall to as low as 3,000 points, as the risk of a ‘protracted selloff’ could create a ‘self-fulfilling recession.’
The biggest bear, Morgan Stanley’s Mike Wilson, has predicted a year-end 3,900 points, and like Chadha, has warned 3,000 points is a very real possibility as recession hits.
Worryingly, Nationwide’s Mark Hackett has highlighted that 2022 marks the fourth time in stock market history that the S&P 500 has posted a loss for seven weeks in a row. The analyst warns that ‘unfortunately, the index was negative over the next 12-months each time.’
And the Bank of America has warned there are ‘lots of reasons to be concerned’ about the upcoming earnings season, with a likely ‘flurry of downward revisions.’ FactSet data shows seven out of the 11 S&P 500 sectors are slashing forecasts.
Of course, not everyone is convinced of the bear case. Oppenheimer chief investment strategist John Stoltzfus thinks the S&P 500 will rise to 4,800 points by the end of 2022, despite the ‘palpable risks of recession.’
The analyst points out that ‘from Dec. 31, 2008, through March 2009, the S&P 500 dropped 25% on expectations that the Federal Reserve would fail in its efforts to get the economy back on track. Instead, what happened was the market rallied 64% from March 9th through the end of the year.’
This leaves the S&P 500’s future trajectory on a collision course with unpredictable earnings.