The S&P 500 may drop one other 100 factors from right here – and even 600 extra, RBC says

The S&P 500 (NYSEARCA:SPY) closed Monday at a 2022 low of three,655.04, however RBC Capital Markets argues the index may shed one other roughly 4% to achieve 3,500 – and even 3,050 if equities expertise a Nineteen Seventies-style meltdown.

“We expect shares are on the cusp of an necessary take a look at,” Lori Calvasina, RBC’s head of U.S. fairness technique, wrote in a notice. “If the S&P 500 (SPY) experiences its typical recession drawdown of 27%, the index will fall to three,501. … A 63% contraction, just like the Nineteen Seventies, would take the P/E to 14x, implying a transfer to three,052.”

Calvasina analyzed 10-year Treasury yields, the Private Consumption Expenditures index of inflation (PCE) and different knowledge going again to the Nineteen Seventies to estimate that the S&P 500’s trailing price-to-earnings ratio will fall to 16.35x from right now’s roughly 18x.

She wrote that such a decline would signify a 57% pullback within the S&P 500’s P/E from its 37.8x pandemic-era excessive – “near the contraction that was seen within the Nineteen Seventies and after the (late Nineties/early 2000s) Tech Bubble.”

As RBC at the moment estimates big-cap firms will earn $218 a share in 2022, a pullback of that dimension would indicate that the S&P 500 falls one other 4.2% from right here to achieve 3,564 by Dec. 31.

Calvasina added {that a} totally different evaluation factors to the S&P 500 (SPY) sinking even additional to round 3,501. In spite of everything, she wrote that the index traditionally loses a median 27% in and round recessions relationship again to 1937 (excluding the 2001 recession and a 1945 downturn that noticed no market pullback). A retrenchment of that dimension would take the S&P 500 (SPY) down to only above 3,500.

The analyst added that an much more pessimistic forecast may see the S&P 500’s P/E sink 63% – the kind of drop recorded between June 1971 and December 1979 in the course of the stagnant Nineteen Seventies. That might slash the index’s trailing P/E right down to 14x, implying that the S&P 500 (SPY) would fall to three,052.

All in, Calvasina stated that the three,500 stage on the S&P 500 (SPY) “might be key to look at, because it represents the purpose at which a median recession can be priced in.”

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