The S&P 500 Has Gotten Crushed. It Could Drop Another 14%.

The recent stock selloff seemed to expose weakness and a lack of buyers.

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It might seem like the stock market can’t fall much from here, but another 14% drop could be in the cards. 

There has been plenty of reasons to sell stocks recently. The Federal Reserve is lifting interest rates to combat high inflation, a move that will likely dent economic and earnings growth, and the market is still gaining an appreciation for the extent of the damage. Lockdowns in China aren’t helping. Those block companies’ access from supplies, bringing their costs higher, yet another concern for earnings.

A selloff in Treasury bonds—as the Fed soon reduces its bondholdings—has brought bond yields higher. That makes future profits less valuable, causing stock valuations to drop. All told, the S&P 500 has fallen about 13% from its March 29 multi-month peak of 4631. 

That selloff may make the market look enticing to buy, but then again, some selloffs actually make the market look even worse. 

And more losses from here indeed look highly plausible at this point. The market may just not be finished reflecting the risks to earnings. Instinet’s chief market technician Frank Cappelleri wrote Monday that the recent losses put the S&P 500 on pace to fall to 3460 soon. That would mark a 14% drop from here. 

That potential loss ins’t possible just because the index has sold off so hard, but also because it failed to stabilize at a key level. The index has gotten buyers at just over the 4100 level several times in the past year. But when the index traded at around that level Monday, there weren’t many buyers there to send the index higher. That means it’s now difficult to map out when buyers will step in. And it was Friday—when the S&P 500 was hovering around 4,100, flirting with breaking below that level—that Cappelleri warned of more ugliness ahead. 

Ultimately, it’s hard to time the market—and buying shares now of companies that look promising is far from unreasonable. Just don’t be surprised to see more losses before things get better. 

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com