The S&P 500 has gained by more than 18.5% in the past three months, making it its best quarter in decades. The performance has been led by technology companies like Amazon, Facebook, Microsoft, and Apple, which account for more than 22% of the weighting of the index. In the same period, the Nasdaq 100 has gained by more than 28% while the Dow Jones has gained by about 16%.
However, a recent report shows that the S&P 500 index could drop by more than 20% in the next half of the year.
The S&P 500 has gained by more than 18.5% in the past three months, making it its best quarter in decades. The performance has been led by technology companies like Amazon, Facebook, Microsoft, and Apple, which account for more than 22% of the weighting of the index. In the same period, the Nasdaq 100 has gained by more than 28% while the Dow Jones has gained by about 16%.
However, a recent report shows that the S&P 500 index could drop by more than 20% in the next half of the year.
Why the S&P 500 index will drop by 20%
In a report released last week, analysts at TS Lombard said that they believe that the S&P 500 index will fall by 20% in the next half of the year. They attributed this to a few factors.
First, the analysts argue that the economic situation is worse than what most analysts are expecting. As a result, they expect that low capital expenditure spending will hinder economic recovery in the United States. In other words, when companies spend less money in capital expenditure, it tend to affect demand for products, which then affects the economy.
As a result, the analysts expect that earnings of companies in the S&P 500 will be hit by more than 20% this year. At the same time, they point that the S&P 500 is overvalued considering that the forward PE ratio is almost 20x, which is higher than the historic average of about 18x. These are the highest multiples since the 2000 dot com bubble. They said:
“Applying a multiple of 16 to our forecast of 2021 earnings yields an S&P index value close to 2000 – bearish indeed!”
You can read the complete report here.
Still, some analysts expect the billions of dry powder to help provide support to the S&P 500. In an interview yesterday, Tom Lee, the founder of Fundstrat said that the vast amount of cash held by fund managers will help support equities. He said:
“But I also think because we’re into quarter-end, there’s been some re-balancing. So I’m kind of in the camp that any weakness is short-lived. I would think July is going to be a strong month for stocks.”
Here is a video of Charles Dumas with his dire warning about US equities.
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S&P 500 technical analysis
The daily chart shows that the S&P 500 index is slightly above the 50-day and 100-day exponential moving averages. The price is also slightly below the 78.6% Fibonacci retracement level. It is also near the tip of the triangle pattern shown in black below. This means that the index may be nearing a breakout in the coming days. As such, the overall near term outlook is neutral but you should focus closely on the important support and resistance levels at $2,928 and $3127.
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