U.S. equities may have established a short-term bottom on Aug.5 when the S&P 500 closed down 8.5% from its peak. According to RBC Capital Markets strategists, this represents a decline that falls within the range of a typical, healthy pullback of 5-10%, while key technical support levels were maintained.
However, strategists caution that they “remain on guard for choppy conditions to persist for a while longer and don’t rule out a growth scare" that could lead to a more significant drawdown of 14-19%, similar to the pullbacks seen in 2010, 2011, and 2015-2016, if economic data continues to disappoint.
For now, their year-end 2024 price target for the S&P 500 remains at 5,700.
While the stock market’s challenges were not fully resolved last week, some pressure has eased.
The net bulls in the AAII sentiment survey have retreated from being 1 standard deviation above the long-term average to a more neutral stance, though they are not yet in deeply oversold territory.
Moreover, the median price-to-earnings ratio of the top 10 names in the S&P 500 has decreased to approximately 24x, down from around 32x at its recent intramonth high, but still remains elevated compared to its historical average of 18x.
Also, the ISM services PMI exceeded both the previous month’s figure and expectations and initial jobless claims came in below estimates, easing some of the economic concerns that arose from the weak ISM manufacturing and jobs reports the prior week.
Despite these improvements, certain challenges persist. Seasonality has been a persistent issue for stocks in recent years, particularly in August, September, and October.
"September, when many sell-side firms hold industry conferences, will likely be a tricky time as companies tend to be reluctant to provide too much forward-looking commentary at this time of the year,” strategists noted.
Nonetheless, investors will be eager for updates on business conditions and corporate expectations. The uncertainty surrounding the U.S. election, which often leads to weakness in equity markets during September and October, will still be unresolved.
Overall, the potential for rate cuts remains a focal point for investors, RBC points out, particularly given the historical tendency for U.S. equities to decline following the first Fed cuts in recent cycles.