The bear market is probably not over yet, the Société Générale warned in a report on the US stock market on Tuesday, adding that it could take a long time if the US economy enters a period of stagnant inflation of the 1970s. could “sink” the S&P 500 an additional 33% lower than current levels, up to 2,525 points.
The S&P 500 officially entered the bear market last week, falling more than 20% from its record on January 3. The US stock index is on track to record its worst performance in half a year as markets expect a more aggressive tightening of monetary policy to tackle inflation, but at the same time worry that interest rates will rise to levels that will lead to in recession.
The head of the Société Générale for the US market, Manish Kabra, notes that he maintains the view that the “risk aversion” and defense will continue in 2022, as the Fed rate hikes in the current downturn will lead to collateral losses, which “But the commitment to tackling inflation looks set to trigger a domino effect, with home and credit markets looking like the next dominoes to fall,” he said. .
He points out that if the Fed fails to control prices, an inflation shock like the one in the 1970s followed by a recession could push the S&P 500 SPX, an additional 33% drop from the current level, to 2,525 points.
According to the Société Générale, the S&P 500 is down an average of 33% during a typical recession, but “the current 24% drop in shares indicates that we have discounted 72% of an average recession”. This means, he adds, that the index will have fully captured a typical recession, falling to 3,200 points.
The S&P 500 fell 0.15% to close at 3,760 points on Wednesday after Federal Reserve Chairman Jerome Powell reaffirmed his plan to fight inflation and said the US economy could face sharp interest rate hikes.
Nevertheless, Société Générale reiterates its positive assessment of the S&P 500 target price.
“We continue to see the fair value of the S&P 500 at 3,850 points and reach 5,000 points by 2024, when the inflation shock should have eased, the Fed will probably not only have completed the increases, but will have started as well. “a cycle of interest rate cuts, and the 10-year US will approach 2% again,” Kabra said in the report.