The S&P 500 will tumble as much as 10% in the summer as growth peaks, Deutsche Bank predicts

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The S&P 500 is due a correction, Deutsche Bank said.

  • The S&P 500 will fall between 6% and 10% in the summer before rebounding, Deutsche Bank predicted.
  • The bank’s analysts said rising inflation may unsettle investors, while earnings growth would cool.
  • Investors have become more cautious about US stocks, with many strategists looking towards Europe.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

The S&P 500 is likely to drop as much as 10% in the summer as economic growth peaks and investors lose their nerve, Deutsche Bank has said.

The benchmark US stock index has risen more than 15% so far this year. That has taken it to 4,344, already putting it above Wall Street analysts’ average year-end target of 4,276, as compiled by CNBC.

Deutsche Bank strategists on Tuesday said investors had gotten ahead of themselves and that they expected the index to fall between 6% and 10% in the summer.

The strategists, led Marion Laboure, said one concern is economic growth is likely peaking after the rapid rebound from the COVID-19 pandemic.

Read more: A weaker economy and stronger dollar threaten to sink the S&P 500 by 11% and send bitcoin tumbling to $12,000, Stifel strategists warn. Here are the 9 industries they recommend hiding in for the rest of 2021.

Laboure and the team said analysts are unlikely to keep upgrading companies’ earnings forecasts, which has been boosting stocks. And they said inflation remains a risk which could unsettle investors, after prices growth hit a 13-year high in the US in May.

However, the Deutsche strategists said the 6% to 10% drop should be a healthy correction for US stocks. “We then see equities rallying back as our baseline remains for strong growth but only a gradual and modest rise in inflation,” they wrote in Deutsche Bank’s quarterly “House View” report.

Investors have become more cautious on US stocks as of late, after a rapid rally in the first few months of the year. Many strategists are looking towards Europe as a place to find more affordable stocks that can benefit from a rebound in the global economy that will help sectors such as financials.

JPMorgan Asset Management said in its mid-year outlook that it expects stocks to rise in the second half of the year, but said investors should expect a bumpier ride as inflation worries “contribute to the jitters.”

Analysts at Barclays said in a recent note: “We believe that concerns over peaking global growth, inflation risk, and a hawkish [Federal Reserve] derailing the market are overstated.

But they said they were only “grudgingly” positive about stocks, given equity prices have already risen sharply in 2021.

Read the original article on Business Insider

The S&P 500 has rebounded 76% since its lowest point in the pandemic crash one year ago today. 2 experts unpack an unprecedented year filled with virus-driven volatility.

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  • The S&P 500 reached its lowest point in the coronavirus-induced market crash exactly one year ago today.
  • Insider spoke with two experts to unpack a volatile year that saw the benchmark index swiftly rebound to new record highs.
  • The analysts say Fed policy and stimulus drove the market rally, but those factors also contributed to investor speculation in 2020.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

One year ago today, the S&P 500 reached its lowest point in the coronavirus-induced market crash. The benchmark index bottomed out at 2,237 on March 23, 2020, following some of the largest down days in market history.

On March 16, the S&P 500 dropped 12%, the same day the stock market’s “fear gauge,” -the Cboe VIX volatility index- closed at a record high. Insider spoke with two analysts to unpack a rollercoaster year for financial markets.

“There was almost a sense of numbness to the continued volatility, but because of the uniqueness of the crisis, there was also a real sense of ‘how low can we go?'” said Ross Mayfield, a Baird investment strategy analyst. “It was also coupled with the panic in the real world – grocery shelves were ransacked, the streets were empty, and there was a real fear amongst most people I talked to.”

Megan Horneman, director of portfolio strategy of Verdence Capital Advisors, said her team tried to focus on the buying opportunity presented instead of worrying about the collapse of the financial markets at the height of the crash last year.

“We added equity exposure and credit exposure throughout March 2020 because we knew the government would be pumping trillions of dollars into the economy to get us through the self-inflicted recession,” she told Insider.

Unprecedented fiscal and monetary relief in March 2020 saved the “health crisis from becoming a financial crisis,” Mayfield said. At the height of the market panic, the Federal Reserve enacted an emergency rate cut, dropping its benchmark index rate to zero while launching a $700 billion asset purchase program. Meanwhile, Congress passed the $2.2 trillion pandemic relief stimulus, the CARES Act.

By early June, the S&P 500 was back within a few percentage points of all-time highs.

“The surprise was in the strength of the rebound,” Mayfield said. “Almost everyone figured it had to crash again or retest the lows, and it just never did (even as the pandemic worsened into the summer).”

While the S&P 500 saw a healthy rebound, investors also began to pour their cash into more speculative assets. Horneman said one of the most surprising parts of the market rebound was witnessing how “massive liquidity can fuel speculation.” She cited the GameStop rally and bitcoin’s nearly 800% run-up as two examples of cash-fueled investors stepping out further on the risk curve in 2020.

Horneman has now seen a shift in market sentiment. While the initial rebound was driven by low rates and stimulus, now stocks have been guided by optimism around the rollout of the vaccine and reopening of the economy. This can be seen by the rotation from stay-at-home tech stocks into stocks that hinge on a reopening, like travel and entertainment names.

The S&P 500 has now gained 76% since its lowest point one year ago. The analysts expect the next leg of the rally to continue to be supported by stimulus and accommodative policy from the Fed, but they also see economic growth driving the market higher.

“In the end the most supportive factor will be the reopening of the global economy. We have the cure, the vaccine,” said Horneman.” Once we can reopen the global economy we will be left with massive stimulus, healthy corporate and consumer balance sheets and substantial pent up demand. This should lead to a multi-year acceleration in economic growth.”

Read the original article on Business Insider