LIVE MARKETS-Three risks that could spur a 10% correction

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THREE RISKS THAT COULD SPUR A 10% CORRECTION

While equities have gotten off to a solid start in 2025 following back-to-back annual gains of more than 20% for the S&P 500 .SPX, Stifel chief equity strategist Barry Bannister sees three risks that could pressure stocks.

In a note out on Monday, Bannister said these risks could result in a correction of about 10%, which would send the benchmark S&P index down to about 5,500.

Bannister said that while some investors are expecting a smooth transition from the current growth-led to a value-led market, or from a price-to-earnings (P/E) to an earnings per share market, "history and our economic views suggest otherwise."

According to Bannister, P/E extremes happen with "new era" or "new economy" thinking and large cap U.S. indexes are currently "well into" their fifth "mania" in about 130 years. If the S&P 500 P/E ratio has peaked, then the large cap growth outperformance over value has also topped.

Previous instances of these growth-to-value peaks have led to a topping out of the S&P 500 and falling sharply in price.

While the market is currently pricing in one 25 basis point rate cut from the Fed this year, Bannister sees core PCE inflation stuck between 2.7% to 2.9% this year, while wage growth slows. This could put the Fed cuts on hold, with "little possibility of rate cuts until GDP weakens," which is not bullish, in Bannister's view.

Lastly, the elevated yield on the benchmark 10-year U.S. Treasury note US10YT=RR and curve resulting from policy and inflation "implies weaker economic data soon," all of which combines for a mild case of stagflation and a correction of about 10%.

As such, Bannister expects defensive value such as utilities .SPCOMU, as well as pharmaceuticals, biotech and life sciences .SPCOMPHB to be among outperformers.

(Chuck Mikolajczak)

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