U.S. stocks could suffer a drop of more than 5% by the end of the year, a veteran Wall Street analyst said, after consumer confidence hit its lowest level since November.
Sam Stovall, chief investment strategist at CFRA Research, said the recent tech-led rally could be coming to an end as June data suggested Americans are feeling pessimistic about the economy.
He warned that technology was the “only sector doing well” after shares in AI chipmaker Nvidia soared earlier this week, giving it a market capitalization of more than $3.3 trillion, overtaking Apple and Microsoft to become the world’s most valuable company.
“How far can this jumbo jet fly on just one engine?” Stovall said in an interview with Yahoo.
“We are increasingly concerned that we may have to endure another decline of 5% or more before the end of the year.”
“If we start to see other economic indicators that suggest the economy is slowing, investors will start to worry that we may be heading for a recession,” he added.
Stovall, a former managing director at S&P Global, likened a potential recession to “resetting the dial” or “digesting” after a binge.
He said the S&P 500 index surged more than 10% in the first three months of the year, with the first-quarter return being the 11th best since the end of World War II.
The analysts said there were “encouraging signs” as the top 15 years of returns “produced gains every year, averaging more than 20%.”
But 14 of the top 15 stocks have since fallen by at least 5%, with some falling by more than 12%, he added.
Stovall said “unexpected” bad economic news, such as a bank failure, could “catch investors off guard,” putting a brake on future stock market gains.
Because the U.S. stock market is where most Americans invest their retirement savings, fluctuations in its prices can directly affect retirees’ income potential.
Most employees have private 401(k) pensions that are topped up with employer contributions.
Executives have warned in recent weeks of a possible economic slowdown due to rising prices and high interest rates.
Bank of America Chief Executive Brian Moynihan warned last month that consumers and businesses are curbing spending.
“Both of our client bases, who are very involved in running the U.S. economy, are saying, ‘Right? I’m treading carefully and I’m slowing down,'” he told investors on May 30.
And former Home Depot and Chrysler CEO Bob Nardelli criticized the Biden administration for “excessive spending” and warned that “fault lines” in the economy were “on the verge of cracking.” In an interview with Fox Business last month.
