The S&P 500 has experienced an impressive seven-month uptick, increasing by 26% since the latter part of October. However, this sustained rise might be reaching its peak, according to Jon Wolfenbarger, founder of BullAndBearProfits.com and a former investment banker at JPMorgan and Merrill Lynch.
In a recent analysis, Wolfenbarger shared a potential market top-off as fears of an impending recession grow.
As history shows, market downturns have often followed the Federal Reserve's rate cuts after hikes, as seen during the severe sell-offs in 2000 and 2008.
With rate cuts anticipated later this year, Wolfenbarger shared with Business Insider that similar troubles could be on the horizon.
According to him, rising unemployment rates and historically heralded recessions, such as those in 2001, 2007 and 2020, are other economic indicators supporting a potential downturn.
Currently, the unemployment rate has surged past its two-year moving average, a precursor seen before major market declines.
Furthermore, a deceleration in corporate earnings could exacerbate stock declines, aligning with a slowing economy.
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Wolfenbarger's outlook remains bleak, predicting a potential drop of over 50% in the S&P 500. Factors contributing to this grim forecast include historically high market valuations and the Shiller CAPE ratio, which exceeds levels seen just before the Great Depression and is surpassed only by the peaks in 2000 and 2022.
Additionally, he said that the low volatility indicated by the CBOE's Volatility Index contrasts starkly with the ongoing high inflation and persistent economic warning signs, like the Treasury yield curve inversion, which has consistently signaled downturns.
With the current yield-curve inversion lasting 580 days, history suggests a severe bear market could lead to a staggering 65% drop in the S&P 500, according to Business Insider.
Despite the market's recovery since October 2022, the unusual bullish sentiment on Wall Street places Wolfenbarger and his cautious perspective in the minority, challenging analysts like Jeremy Grantham, Marko Kolanovic, and Albert Edwards' optimism.
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This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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