'Bear Market Rally' Ends... US Large-Cap Stocks Drop Up to 10%

There is a forecast that the S&P 500 index, centered on large-cap U.S. stocks, could fall to the 3700 level in the second to third quarters of this year.

With renewed concerns over inflation and an increased probability of a recession due to the regional banking crisis, it is expected that the "bear market rally" (a temporary rally within a bear market) will end and a downtrend will begin.

According to Bloomberg on the 11th (local time), Wells Fargo predicted that the S&P 500 index will undergo a 10% correction within the next 3 to 6 months. The S&P 500 closed at 4108.94 that day, and the analysis suggests the index could drop from the 4100 level to 3700. This would return it to the level last seen in November of last year, when it hit its lowest point.

The team led by Wells Fargo's equity strategist Christopher Harvey stated in a report that "deteriorating economic conditions will drive the (S&P 500) index down." The report identified aggressive monetary policy, liquidity concerns stemming from the U.S. Silicon Valley Bank (SVB) crisis, and economic deterioration caused by tightening bank lending as factors dragging the market down.

With inflation still strong and the U.S. Federal Reserve (Fed) expected to continue tightening, a decline in corporate profits and a recession are deemed inevitable. The report pointed out that "credit tightening is making financing more difficult, accelerating the economic slowdown."

[Image source=Reuters Yonhap News]

The S&P 500 index rose about 7% in the first quarter of this year. Wells Fargo analyzed that despite concerns about a recession, ongoing warnings of deteriorating corporate earnings, and an unprecedented banking crisis, the U.S. stock market did not suffer significant damage in Q1. However, as earnings deterioration began to emerge, market momentum started to decline.

They expect the downtrend to begin around the time companies announce their Q1 earnings. Most sectors' profit forecasts are being sharply revised downward, and the number of sectors experiencing significant negative growth is increasing. Wells Fargo also analyzed that even assuming the Fed's tightening cycle ended in March, the relief rally has likely already been priced into stock prices.

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