S&P 500 Crash to 3500? Wall Street Not Buying the Dip?

US stocks entered 2022 on a positive note and the S&P 500 hit a record high on the first trading day of the year itself. Apple’s market cap hit the milestone of $3 trillion on the same day.

Notably, Wall Street analysts were not too bullish on stocks heading into 2022, and on average analysts saw only single-digit returns from the S&P 500 in the year. At the beginning of the year, analysts were mainly concerned about spiraling inflation, slowing growth, and high valuations.

Inflation was particularly worrying market participants as the Fed had begun tapering in November 2021 only. As the year progressed, several other factors started to weigh down sentiments. Russia’s invasion of Ukraine led to a rise in energy prices and fuelled inflation around the world. Raw material prices also spiked as Russia is among the major producers of metals like aluminum and nickel. Rising inflation meant that the average consumer has less money to spend on discretionary goods.

Retail companies admitted to a slowdown in sales of discretionary products. Companies with pricing power have been able to pass on the higher input costs to consumers. Recently, Tesla announced a price hike across all its models in the U.S. The price hikes come at a time when some of the other electric vehicle companies like NIO are feeling margin pressure.

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Rising Interest Rates Drive Down the S&P 500

Along with the Russia-Ukraine war, the intermittent lockdowns in parts of China are also adding to inflationary pressures. As inflation has shown no signs of abating and hit a new pandemic high of 8.6% in May, the Fed raised rates by 75 basis points at its recent meeting. While the S&P 500 and Nasdaq rose on the announcement, they fell the next day on fears that Fed’s aggressive tightening could lead the US economy into a recession.

The Fed’s dot plot shows that Committee members see rates rising by another 1.75% by the end of 2022. Amid the multiple headwinds, several brokerages have revised down their S&P 500 target for 2022. Many bears now see the world’s most popular index falling towards 3,500.

Michael Wilson, the leading US equity strategist at Morgan Stanley, was among the most bearish analysts on the markets at the beginning of the year. While Wilson was an outlier previously, his bearish thesis has played out well. Now, he is calling for the S&P 500 to fall to 3,500. Wilson predicts that the US Federal Reserve would start supporting the markets only when the S&P 500 falls below 3,500. For now, the US Central Bank has indicated that lowering inflation, which is at the highest level since 1981, is its top priority.

Some Analysts See S&P 500 Falling to 3,500

Bank of America technical research strategist Stephen Suttmeier also sees 3,500 as key support for the S&P 500. The current market sentiments are quite subdued. Jim Cramer also advises investors to wait for the storm to settle and consider buying dividend stocks.

Cathie Wood of ARK Invest, whose ETFs have underperformed by a big margin this year believes that stocks have bottomed. Even Warren Buffett, who was a net seller of stocks in all the quarters since Q4 2020, also invested billions of dollars into buying stocks in the first quarter of 2022.

While Buffett has spent a lot of money on buying oil stocks, he has also invested in HP as well as Apple. Apple is Berkshire’s largest holding by a wide margin. It is the best-performing FAANG stock of the year. Gene Munster, who had correctly predicted Apple’s market cap rising above $1 and $2 trillion, continues to remain bullish on the iPhone-maker and sees its market cap rising above $3 trillion.

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