A Stifel strategist who accurately predicted the market downturn over the summer now anticipates that the correction could reach a decline of 10% or more.

Barry Bannister from Stifel Financial predicts a significant decline in the S&P 500 over the next few months. As the chief equity strategist, he believes the ongoing global market downturn suggests an interest rate cycle slowdown and a potential double-digit correction. Bannister maintains that Stifel’s year-end target for the S&P 500 at 5,000 is reasonable, considering the recent job data and the Federal Reserve’s delayed interest rate cuts. This target implies a 10% drop by October and a 12% decrease from the index’s peak in July. Earlier in June, Bannister forecasted the S&P 500 might fall to around 4,750 by the end of the third quarter. Last week, the S&P 500 closed at 5,346.56.

Bannister’s pessimistic outlook is driven by several factors: the rapid decline of short-term rates compared to long-term rates, widening credit spreads that limit financial easing, the potential reversal of the yen “carry trade” which could result in the repatriation of billions from Japan’s international investments, and geopolitical tensions in the Middle East. As major tech and growth stocks continue to decline, Bannister reiterated Stifel’s preference for “defensive value” sectors like utilities, health care, and consumer staples. He noted a swift shift from cyclical to defensive stocks, aligning with their expectation of persistent inflation and economic slowdown into the second half of 2024.

Bannister also warned that a 50 basis-point cut by central bankers in their upcoming September meeting would be a significant error, sending a negative signal to the market. Currently, traders are anticipating a 25 basis-point cut as the most likely scenario. For reference, one basis point is equivalent to 0.01 percentage point.