Watching trillions of dollars in wealth evaporate in just a few weeks gets the imagination reeling. And already three well-known market strategists are trying to find when the S&P 500 might hit bottom.
Here's a summary. If the S&P 500 keeps falling, expect it drop anywhere from another 4.9% to a harrowing 43%. The wide range of forecasts come from long-time market strategist CFRA's Sam Stovall on the optimistic end. Bank of America's equity strategist Savita Subramanian, who gave investors a heads up last year that a big sell-off was coming, is middle-of-the-road saying another 15.1% drop is likely. And then there's GMO's Jeremy Grantham who's looking for a 43.3% plunge from here.
"We think the coming week's market action will be very telling as to the severity of the overall decline," Stovall said.
S&P 500's January Sell-Off
You're not the only investor to note the speed and severity of the S&P 500's sell-off in January.
The S&P 500 just on Monday dropped as much as 3.9% at the lows of the day. At that point, the S&P 500 plunged into a 10% correction in just 14 trading days, says Ryan Detrick, strategist at LPL Financial. That would have been the fourth-fastest 10% correction from an all-time high in history, he says.
Much of the pain eased later in the day, with the S&P 500 ending up 0.3%. But much damage is done. Many big stocks are getting hammered. Meme stocks many new investors piled into are still down hard. And losses are piling up.
Investors are now down $4.2 trillion just this year so far, says Wilshire Associates. The question now is how much worse can it get? "The speed with which the S&P 500 fell by 5% is not necessarily a good indicator either," Stovall said.
How Low Can The S&P 500 Go? An Optimistic Look: Down 4.9%
Stovall is the least bearish among the three, at least for now. He's using Fibonacci retracement levels as his guide.
Using this measure, he's looking for the S&P 500 to find support at 4,193. If that's the line in the markets that holds, it would mark a pretty modest 4.9% dip from Monday's closing price. Interestingly, the S&P 500 found its low Monday at 4222.62, or less than 1% away from this first Fibonacci level. This would put the market's total decline at 12.6%.
If the S&P 500 doesn't hold this point, though, Stovall thinks the next point of support comes at 3,819. If that's the case, the S&P 500's decline would be a bear of 20.4%. He's not looking for this to happen, though.
Stovall thinks the S&P 500 is simply digesting its massive 20%-plus gain last year.
"The S&P has always experienced a market decline in the calendar year following 20%+ annual gains," he said. "Encouragingly, all of the declines that started in the first half of the new year got back to breakeven before the year was over."
Bank of America's Moderate Warning: S&P 500 Down Another 15.1%
BofA's S&P 500 picks might not always hit the mark. But the bank nailed it when it warned investors back in November 2021 a crash was likely this year.
How did BofA's equity and quant strategist Subramanian sound the warning? A much-watched stock market indicator that called the 2000 crash signaled expectations are running too hot — setting up investors in many S&P 500 sectors for big disappointment.
Fifteen of the 20 stock metrics BofA monitors signaled the S&P 500 is already "statistically expensive." But one of the key measures not yet at critical levels, the P-E growth ratio (or PEG) is actually distorted in a way that spells bigger trouble, says BofA. And that's important as the PEG ratio was a lonely tipoff of overvaluation in the major crash at the end of the '90s tech bubble.
"Today's level would suggest losses of 20% over the next 12 months based on the historical relationship," said the BofA report co-authored by equity and quant strategist Subramanian published in November 2021.
Jeremy Grantham's Scary Call: 43.3% Drop Coming For S&P 500
Co-founder of investment firm GMO Jeremy Grantham wins with one of the scarier predictions. He's calling for major implosion of what's he's calling the "fourth superbubble of the last hundred years."
Specifically, he's calling for the S&P 500 to crash to its long-term trend level of 2,500. If he's right, that would mark a hallowing 43.3% drop from Monday's close. The frequently bearish investor and early pioneer in index investing says speculation in money-losing companies, cryptocurrencies and "meme stocks" are the latest phases in one of the biggest bubbles in recent history. And he says the Federal Reserve only further inflated the bubble in the past few years.
"This checklist for a superbubble running through its phases is now complete and the wild rumpus can begin at any time," he said. "But now, for the first time in the U.S. we have simultaneous bubbles across all major asset classes."
He says there are few ways to avoid the pain ahead. "A summary might be to avoid U.S. equities and emphasize the value stocks of emerging markets and several cheaper developed countries, most notably Japan," he said.
Who will be right? Maybe no one. Which is why it's important to watch the big picture. And keep an eye on key S&P 500 market indicators to make sure you're on the right side of the market when it finally finds its direction.
How Low Can The S&P 500 Go?
Forecasts from three widely followed experts
| Firm | Strategist | S&P 500 target* | % ch. from Monday's close |
|---|---|---|---|
| CFRA | Sam Stovall | 4193 | -4.9% |
| Bank of America | Savita Subramanian | 3746 | -15.1 |
| GMO | Jeremy Grantham | 2500 | -43.3 |
Sources: IBD, S&P Global Market Intelligence, * — based on cited published reports
Follow Matt Krantz on Twitter @mattkrantz
