U.S. stocks could drop another 17% as big tech shares falter, commodities soar and credit spreads break out, according to Evercore ISI.
The S&P 500 is no longer oversold, commodities are rising as the dollar strengthens, credit spreads—the extra yield over Treasuries investors demand to lend to a company—are breaking higher and action in stocks like Alphabet Inc. is worrisome, said Rich Ross, a technical analyst at Evercore. He has a “high conviction” that this is consistent with a level of 3,800 on the S&P 500—about 17% below current levels.
“I have bought every dip for almost two years and 2,000 S&P points, but on Jan. 21 I stopped buying them,” Ross wrote in a note Wednesday. “I’ll be back at 3,800 (or 4,800).” The index ended Wednesday’s session at 4,589.38, just 4.3% below its Jan. 3 record close of 4,796.56.
Market participants are grappling with the coming impact of rate hikes and quantitative tightening from the Fed and other central banks as inflation surges. Most strategists see more volatility on the way. Many, like JPMorgan Chase & Co., are urging investors to buy dips in stocks—but others, like Goldman Sachs Group Inc., are recommending caution with valuations still high and amid uncertainty over the Fed’s impact on markets and financial conditions.
Evercore's Ross: S&P 500 shart book consistent with a level of 3,800
Ross does have some buy recommendations, including energy, utilities, consumer staples, real estate investment trusts and “the highest quality” tech.
One thing he doesn’t see doing well: Cathie Wood’s Ark Innovation ETF (ARKK), which he predicts will track the collapse of the tech bubble.
“ARKK is the ‘Sum of All Fears’ and has another 18 months to fall.”
This article was provided by Bloomberg News.