Stock market crash: how far can the S&P 500 go?

Information sourced from Reuters and Business Insider

After a remarkably strong first quarter, the US stock market pulled back in April for the first time since October last year. The S&P 500 dropped 6.6% in the first three weeks of April which allowed the overbought conditions to reset. The pullback was attributed to the risk-off sentiment from increasing geopolitical tensions between Iran and Israel, but the technical setup also favoured the reversal.

But the momentum reversed higher once again last week as the tensions eased. Economic data in the US has also remained strong, improving sentiment in the stock market. 

Interestingly, the focus on markets has shifted since the start of the new year. The “good data is bad” rhetoric that dominated sentiment in 2023 is no longer in effect, with equity performance and economic data currently displaying a positive relationship, even if it pushes back the expectations of rate cuts from the Fed. But, some analysts have started to show concern for the economy as the lack of a Fed pivot is expected to weigh on growth going forward. 

But how far could the pullback go? Paul Dietrich, the chief investment strategist at B Riley Wealth Management has issued a stark warning that the S&P 500 could plummet by 44% to approximately 2,800 points. The forecast seems slightly far fetched at this point, but it is not uncommon for a selloff to quickly gather steam once sentiment turns. The bullish bias has not yet been priced out in the short term but the pullback from the past few weeks has allowed the long-term outlook to become slightly more unclear. 

How the soft landing rhetoric evolves over the coming months given the Fed’s ability to cut rates will likely determine the longer-term momentum. For now, the economy seems to be holding up well despite the prolonged tightness in monetary policy. If this outlook continues, then sellers in US equities are going to struggle to garner enough momentum to turn the bias downward. However, any signs of weakness in the US economy could tip the balance in favour of the sellers, which could see a more prolonged pullback like the one predicted by Mr Dietrich.