Home > Barclays says the S&P 500 could still fall 8%, sees more pain for higher valuation stocks

Barclays says the S&P 500 could still fall 8%, sees more pain for higher valuation stocks

  • Barclays says the short-term outlook for stocks is negative, but a rebound has happened after every first Fed rate hike in a tightening cycle.
  • Investors seeking a "buy the dip" should watch the market for any further rot

Barclays’ Maneesh Deshpande, the head of equity strategy in the US, has said that it’s too early to buy the market dip as there’s the potential for another 8% rout for the S&P 500.

On Monday, US markets rebounded in late trading to close higher and recoup losses suffered during last week’s brutal dump into correction territory. Tuesday however saw the negativity creep back as Wall Street declined amid investor jitters over the Fed rate hikes.

The S&P 500 fell 1.2% to see year-to-date losses remain near 10% and maintain the vulnerability that could see further declines, Barclays said in a note.

The vulnerability is also being felt in Nasdaq, which fell 2.2% on Tuesday, and the Dow Jones Industrial Average that closed 0.2%.

More pain for stocks, says Barclays

According to Barclays, the S&P 500 could still rise to its recent peak around 4,800 with a major rebound later in the year. The short-term outlook though is not as encouraging, Deshpande noted. 

In quotes cited by the Insider, the strategist explained that analysing the market using pre-pandemic valuations suggests the SPX still has room for a fresh downside. He believes the pain will impact higher valuation stocks more.

In their assessment, the bank sees a new floor for stocks pegged on a Fed put- a scenario where the central bank comes to the aid of the stock market in the face of extensive losses by adopting monetary policies that help stem the downside.

If this were to happen, it will need the market to dump at least 20% from their all-time highs. With these losses currently around 9%, fresh sell-off will have to extend further into a correction curve to bring the sentiment into play.

Despite this outlook, Barclays says the S&P 500 could reach recent historic levels, noting that bull markets for equities have historically not ended on the first of Fed’s interest hikes in a tightening cycle.

On average, post-hike years have been followed by a 6% upside flip for the SPX, buoyed by strong corporate earnings. 

In this case, investors might want to watch out for any more weakness in the indexes, which could offer another buying opportunity.

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