Stock Markets Could Go Lower, Analysts Predict S&P 500 Crash to 3,000

Mohit Oberoi, CFA - Author
By

Jul. 1 2022, Published 9:46 a.m. ET

U.S. stocks just suffered their worst first-half crash since 1970. After three years of double-digit returns, the S&P 500 has looked weak in 2022. What’s the prediction for U.S. stocks and how low could they go as the market crash looks far from over?

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Like in the 1970s, rising inflation, which is driven by soaring crude oil prices, is making markets apprehensive. We also have a slowing economy. Micron provided a grim commentary calling for a 5 percent decline in smartphone sales and a 10 percent decline in PC sales in 2022.

Stocks could go lower in 2022.

U.S. stocks could go lower in 2022. While markets have fallen, they still don’t seem to price a recession. Analysts have been raising the odds of a recession and even during the recent earnings calls, many companies have faced questions about how they are preparing for a recession.

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Even business leaders have been worried about a recession. Elon Musk, the world’s richest person, is having “super bad” feelings about the economy.

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Not only analysts and companies, but even the average American is also worried about a recession. Google searches for "recession" are at their highest since 2020, when the U.S. economy went into a recession. That recession ended the historic 11-year expansion. However, the recession was short-lived as the wave of stimulus and accommodative monetary policy helped the economy recover.

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Many brokerages expect the S&P 500 to crash to 3,000 if a recession hits.

Bank of America looked at statistical data of past U.S. recessions and found that on average, stocks dropped 37.3 percent and the market crash lasts for 289 days. It concluded that the S&P 500 would bottom at 3,000 on October 19. Morgan Stanley also expects the S&P 500 to fall to 3,000 to fully price a recession while Société Générale believes that the world’s most popular index would slump to 3,200.

Most brokerages have been revising their S&P 500 predictions for 2022 fearing a recession. While many economists believe that a recession is coming, and Cathie Wood of ARK Invest has said that the economy is already in a recession, President Joe Biden and members of his cabinet don't think a recession is inevitable. Fed Chair Jerome Powell has also echoed similar views while admitting at a Congressional testimony that the rate hikes might actually cause one.

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The crash in U.S. stocks is far from over.

While stocks recovered towards the end of June, the recovery was short-lived — just like the many such mini rallies that we’ve seen in 2022. Markets have fallen to newer lows in the year amid the economic turmoil.

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While the Fed’s rate hikes should help tame down inflation, and we’ve already started to see signs of it peaking, the slowdown in the economy would become the bigger worry as the year progresses.

Many sectors of the economy are now feeling stress. The housing market, which was a pillar of strength for the economy over the last few quarters, has also shown signs of stagnation. The mortgage industry has also been in tough shape amid the rate hikes. A lot of industries that were supply-constrained are now witnessing a moderation in demand.

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There are ample signs of an impending recession in the U.S. even though it might not be inevitable. However, to fend off a recession, crude oil prices have to drop significantly from these levels, whose probability would depend on how the ongoing conflict between Russia and Ukraine develops in the back half of the year.

Overall, the Fed and Biden administration face a tough task in averting a hard landing for the U.S. economy. If the duo can steer the economy towards a soft landing, we could see stocks rise. Otherwise, we might see the S&P 500 fall further in the second half of 2022.

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