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The S&P 500 sank to its lowest level in a year on Thursday, and further declines are in store that could drag the index below the 4,000 threshold, CFRA's Sam Stovall told Insider on Thursday.
The massive, broad-based market selloff pushed the tech-centered Nasdaq Composite down by more than 5%. The S&P 500 tumbled as much as 4%, touching an intraday low of 4,106.01 that marked its weakest point since May 2021. A simultaneous selloff in the bond market lifted the 10-year Treasury yield to its highest rate since 2018. Bond prices move inversely to yields.
The carnage wiped out Wednesday's stock rally that saw the Dow Jones Industrial Average soar more than 900 points after Federal Reserve Chairman Jerome Powell said the central bank wasn't actively considering a hefty interest rate increase of 75 basis points.
"Yesterday was the positive reaction by the stock market whereas today is more of a negative reaction from the bond market," said Sam Stovall, chief equity analyst at independent investment firm CFRA, in an interview.
"What the bond market is saying is, 'The Fed is not being aggressive enough.' And as a result, the 10-year yield is now approaching 3.1%, and that higher yield is now spooking both the bond market and equity markets," he said. "It's really it's a tug of war between the bond market that wants a more aggressive Fed and the stock market that wants the Fed to move at a more moderate pace."
Tech stocks were hit especially hard as higher yields can cut into the value of future earnings. And more pain is likely ahead with the Fed's hawkishness pressuring bonds yields further.
The Fed is racing to cool down inflation that in March had accelerated to 8.5%, the fastest increase since December 1981. Fed funds futures investors on Thursday priced in an 82.9% chance the central bank will raise its key rate by 75 basis points at the June 14-15 meeting.
The S&P 500 is poised to go even lower, said Stovall.
"For a while, I've been saying that I think 3,800 on the S&P 500 appears to be an appropriate level for a couple of reasons," he said. "One, from a fundamental perspective, the average P/E on forward 12-month earnings since 2000 has been 17. And 17 times the 2022 estimated earnings brings us to around 3,860."
Two technical indicators — the Fibonacci retracement level and head-and-shoulders pattern — also point to the S&P 500 moving down to 3,800, representing about 8% in further downside.
"Maybe we're getting close to wash out in the market. But I still think that there's more downside potential and certainly more volatility," he said.
He added: "We've had two and a half times the number of 1% daily moves year to date through the end of April than we have on average since World War II."
