The next 500 points for the S&P 500 are down, says Stifel. Here's why.

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By Jamie Chisholm

Stock-index futures are steady at the start of the week, suggesting the S&P 500 SPX will begin trading only about half a percent shy of a fresh record close.

Whether the latest rally can be maintained will likely depend on the consumer price index report for April, due for release Wednesday morning.

If CPI inflation comes in hotter than expectations for a fourth month in a row then the market will probably start once again reducing bets on Federal Reserve rate cuts this year, and that could hobble the broader bullish mood.

Indeed, it is such concerns about stubbornly sticky inflation – notably in the Fed’s preferred core personal consumption expenditure measure – that prompts Barry Bannister, managing director at Stifel, to call for a sharp drop in stocks over coming months.

“With rates normalized and the mid-2024 pop in core PCE to just over 3% that our models indicate we expect Fed rate cuts to be pushed back further, causing a middle quarters correction for equities,” says Bannister and the Stifel team in a note published Sunday.

They see a decline in the S&P 500 to about 4,750 in the second or third quarter of this year, a correction of roughly 10% or about 500 points.

Central to Stifel’s reasoning is that contrary to what many economists believe, the U.S. experienced a slowdown a while ago that is responsible for much of the easing of price pressures from the peaks, and that now activity remains sufficiently robust that inflation will remain well above the central bank’s 2% target.

“While most strategists were expecting a recession last year or are eagerly attempting to call the start of one in the next year, we have been of the view that the approximately 5 quarters 1Q22 to 2Q23 were a ‘pseudo-recession’ and the Fed already harvested all the normal post-recession disinflation we would expect,” says Stifel.

Labor demand is still exceeding supply and Stifel predicts manufacturing purchasing managers indices will show expansion around the middle of the year, both signaling resilient wages into the start of 2025. In addition, Stifel reckons that non-farm productivity may have peaked after its typical post-recession surge, which will also be inflationary as it declines.

Taken all that together and Stifel’s inflation model shows core PCE in the second half of 2024 at more than 3%.

“As a result, the sustained 2% core PCE inflation the Fed seeks is a pipe dream…our view is that rate cuts will be pushed back,” they contend.

Stifel also notes some technical issues that explain its caution on the S&P 500. To be what it terms a “secular bull market,” the inflation-adjusted S&P 500 must have made new highs, and this one hasn’t yet, they say.

The mechanism for a correction is a lower S&P 500 price to earnings multiple, which Stifel contends is currently expensive relative to current financial conditions.

Finally, Stifel warns that what it terms a “growth mania” led by AI and tech stocks may lift the market. “[B]ut that likely round-trips by 2025, so it is a short.”

Markets

U.S. stock-index futures (ES00) (NQ00) (YM00) are higher as benchmark Treasury yields BX:TMUBMUSD10Y dip. The dollar index DXY is a fraction lower, while oil prices (CL.1) inch up and gold (GC00) is trading around $2,340 an ounce.

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The buzz

U.S. economic data due on Monday include the New York Fed’s survey of consumer expectations for April, released at 11 a.m. Eastern. The highlights of the week are likely to be Wednesday’s CPI and retail sales data.

Fed Vice Chair Philip Jefferson and Cleveland Fed President Loretta Mester are together on panel to discuss Fed communications, starting at 9 a.m.

The Federal Reserve Bank of Cleveland will host the Central Bank Communications: Theory and Practice conference in person in Cleveland, Ohio.

Shares in GameStop (GME) are jumping nearly 17% in premarket action after Roaring Kitty made his first social media post on the X service in three years, in a cryptic image meant to show he was paying attention. Shares of fellow meme-stock AMC Entertainment (AMC) are up 5% in sympathy.

OpenAI will hold an event on Monday to showcase “some new stuff” according to Sam Altman.

China will start selling the first tranche of a 1 trillion yuan ($138 billion) ultra-long sovereign bond package on Friday, it was announced on Monday, the proceeds from which will be used to boost the economy.

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The chart

How much lower does the blue line on this chart have to go before it becomes a problem for equities? Bond prices have rallied on the latest batch of economic indicators, which were mostly weaker than expected, notes Ed Yardeni, president and chief market strategist at Yardeni Research. “Nevertheless, lower bond yields boosted the stock market’s valuation multiple. For stocks, both good news and bad news are good news for now.”

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   GME     GameStop 
   TSLA    Tesla 
   NVDA    Nvidia 
   AMC     AMC Entertainment 
   NVAX    Novavax 
   AAPL    Apple 
   NIO     Nio 
   AMZN    Amazon.com 
   TSM     Taiwan Semiconductor Manufacturing 
   PLTR    Palantir Technologies 

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-Jamie Chisholm

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05-13-24 0625ET

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