Daily Stock Market News

The S&P 500 could drop another 100 points from here – or even 600 more, RBC says

The S&P 500 (NYSEARCA:SPY) closed Monday at a 2022 low of 3,655.04, but RBC Capital Markets argues the index could shed another roughly 4% to reach 3,500 – or even 3,050 if equities experience a 1970s-style meltdown.

“We think stocks are on the cusp of an important test,” Lori Calvasina, RBC’s head of U.S. equity strategy, wrote in a note. “If the S&P 500 (SPY) experiences its typical recession drawdown of 27%, the index will fall to 3,501. … A 63% contraction, similar to the 1970s, would take the P/E to 14x, implying a move to 3,052.”

Calvasina analyzed 10-year Treasury yields, the Personal Consumption Expenditures index of inflation (PCE) and other data going back to the 1970s to estimate that the S&P 500’s trailing price-to-earnings ratio will fall to 16.35x from today’s roughly 18x.

She wrote that such a decline would represent a 57% pullback in the S&P 500’s P/E from its 37.8x pandemic-era high – “close to the contraction that was seen in the 1970s and after the (late 1990s/early 2000s) Tech Bubble.”

As RBC currently estimates big-cap companies will earn $218 a share in 2022, a pullback of that size would imply that the S&P 500 falls another 4.2% from here to reach 3,564 by Dec. 31.

Calvasina added that a different analysis points to the S&P 500 (SPY) sinking even further to around 3,501. After all, she wrote that the index historically loses a median 27% in and around recessions dating back to 1937 (excluding the 2001 recession and a 1945 downturn that saw no market pullback). A retrenchment of that size would take the S&P 500 (SPY) down to just above 3,500.

The analyst added that an even more pessimistic forecast could see the S&P 500’s P/E sink 63% – the type of drop recorded between June 1971 and December 1979 during the stagnant 1970s. That would slash the index’s trailing P/E down to 14x, implying that the S&P 500 (SPY) would fall to 3,052.

All in, Calvasina said that the 3,500 level on the S&P 500 (SPY) “will be key to watch, as it represents the point at which a median recession would be priced in.”

For more macro market analysis, click here.

Read More: The S&P 500 could drop another 100 points from here – or even 600 more, RBC says

You might also like
A note to our visitors

This website has updated its privacy policy in compliance with changes to European Union data protection law, for all members globally. We’ve also updated our Privacy Policy to give you more information about your rights and responsibilities with respect to your privacy and personal information. Please read this to review the updates about which cookies we use and what information we collect on our site. By continuing to use this site, you are agreeing to our updated privacy policy.