The U.S. stocks witnessed a sharp pullback on Monday, pushing the S&P 500 index down 3% to 5,186, its lowest closing price since early May. However, analysts at Stifel believe the correction may continue further, arguing the latest dip “is not a blip" and that it is "too soon to jump back in."
More concretely, the investment bank reiterated its view that the S&P 500 could retreat to 5,000 by October 2024, which would mark a 12% decline from its peak in mid-July. The drop would also be “in line with past mid-cycle slowdowns affected by the economy and Fed policy responses,” such as those in 2011-12 and 2015-16.
Analysts cited slowing U.S. economy and sticky inflation in the second half of the year as key headwinds that could lead to further declines.
“Though we describe a low double-digit correction there is also risk of a bear market if the slowdown becomes a recession which, by history and definition, would be a surprise to investors and the Federal Reserve,” analysts continued.
Against this backdrop, Stifel believes Defensive Value sectors are likely to outperform the S&P 500 in the back half of 2024. These include biotechnology, Commercial & Professional Services such as waste handling, Food, Beverage & Tobacco, Healthcare Equipment & Services, Household Products, Life Sciences, Pharmaceuticals, Staple Retailers, and Utilities.
Analysts also note that these sectors have historically provided a front-loaded relative performance hedge against a potential recession.
U.S. stocks suffered significant losses on Monday, extending last week's sell-off due to recession fears and a sharp decline in Apple (NASDAQ: NASDAQ:AAPL) shares after Warren Buffett reduced its stake by 50%.
All three major indexes saw their largest three-day percentage drops since June 2022, closing at their lowest levels since early May.
Recession concerns rattled global markets, pushing investors away from risky assets following weak economic data, including Friday's disappointing U.S. payroll report. Investors are increasingly anxious that the economy is slowing faster than expected and that the Federal Reserve made a mistake by keeping interest rates steady at its last meeting.