Stifel reaffirms its forecast that S&P 500 will drop 10% by October

In a note to clients Monday, Stifel analysts maintained their projection that the S&P 500 will experience a significant correction, expecting a drop of just over 10% by October 2024.

Despite acknowledging that their previous timing was premature, the analysts reiterate their concerns, highlighting that the underlying issues remain the same.

"Our concerns and expectation for just over a 10% S&P 500 correction by Oct-2024 are largely the same, but our timing in expressing those concerns three months ago was too early and thus wrong," Stifel wrote.

The forecast adjustment now targets the 5,000 range for the S&P 500, up from the prior view of a 10% correction to 4,750.

This revision is driven by anticipated persistent inflation and slower-than-expected economic growth in the latter half of 2024. Stifel describes this combination as "moderate stagflation" and views it as a negative factor for equities, particularly the overextended S&P 500 Growth relative to Value.

"This mix constitutes 'moderate stagflation' and is negative for equities, particularly over-extended S&P 500 Growth relative to Value," the analysts explain.

Stifel suggests that while some market participants might see this scenario as favorable for a rotation and continuation of the bull trend, they remain skeptical.

Instead, they prefer defensive value sectors such as Healthcare, Consumer Staples, Utilities, and Quality during this period.

The analysts outline several key points supporting their forecast. Firstly, the S&P 500 correction is expected to be driven by a slower economy and persistent inflation, which will lower the P/E ratio.

Defensive value industries are expected to outperform the broader S&P 500 in this economic climate.

Furthermore, Bitcoin, trading continuously, is used as a gauge of speculative froth and currently indicates a potential 10% correction for the S&P 500. Stifel also says the enthusiasm for new technologies, including AI, is believed to reduce forward returns for the S&P 500 over the next decade.

Stifel highlights the underestimated risks posed by the "global struggle between right-wing and left-wing populism."