S&P 500 Risks Deeper Declines as Less Than Half of Stocks Hold 200-Day Average

The announcement of new U.S. tariffs caused a surprising wave of selling in financial markets, sparing no sector. The consequences of this decision have been shaken, and the market is now in a state of uncertainty.

The uncertainty has also affected monetary policy expectations, with investors now predicting more rate cuts by the Federal Reserve.

This is evident from the collapse in the probability of the “no cut” scenario according to the CME Fed Watch Tool. To make matters worse, the recent ISM data showed a sharp decline in new orders, a worrisome sign for future economic growth.

In addition, only 47 percent of companies listed in the S&P 500 are priced above their 200-day moving average, a level that in the past has been associated with average declines of 7.3 percent over the next 12 months. However, is it really justified to be so concerned?

A major cause of the panic is the Atlanta Fed’s forecast, which significantly revised downward its estimated growth for the current quarter.

According to the GDPNow model, the annual increase went from +2.3 percent to -2.8 percent in just a few days. This dramatic revision has led many analysts to speak of a “Trumpcession,” pointing to a possible risk of recession under a new Trump administration.

It is important to note that the Atlanta Fed’s forecast is an exception to most current estimates. For example, the New York Fed’s Nowcast model still forecasts annual growth of +2.9 percent in the first quarter, in line with previous expectations. This suggests that the sharp drop in the forecast could be influenced by temporary factors or specific calculation methods. Not long ago, the same model predicted +4.0% growth.

Stock markets are in turmoil because of growing economic concerns. Technology stocks, which have been driving the stock market upward for years, are now among the main losers, with companies such as Nvidia (NASDAQ:NVDA) and Tesla (NASDAQ:TSLA) posting negative performances.

The aviation sector is also coming under pressure, with companies such as Delta Airlines (NYSE:DAL) seeing sharp declines in profits due to economic uncertainty. The financial sector is under particular pressure as banks increase their reserves for potential loan losses, a sign that credit quality may deteriorate in the coming quarters.

The volatility futures market is showing signs of concern as contracts maturing in March are more expensive than eight-month contracts. This “backwardation” has been present for four consecutive sessions and in the past has predicted long periods of impending turmoil.

Historical facts have shown that when volatility futures remain in backwardation for more than five days, the market suffered further losses in the following month with an average of 4.5 percent.

Hedge funds are adapting to the current economic situation and reducing their exposure to equities. Instead, they are focusing their investments on safer assets such as U.S. government bonds, highlighting strong pessimism among institutional investors.

Goldman Sachs statistics also reflect this trend, with a reduction in exposure to stocks similar to that seen during the market crash in 2020.

The history of financial markets has taught us that phases of volatility and panic are common and cyclical.

Often, sudden fluctuations in economic expectations are driven by emotions rather than a rational response to hard data. It is important to note that the tariffs have not yet taken effect, so it is premature to draw firm conclusions about their impact on markets.

My prediction is that the tariff war will not materialize, and the United States will soon agree. In addition, it seems increasingly likely that the conflict in Ukraine will end soon and the FED’s interest rates will fall, which will have a positive effect on the market in the next quarter. I predict that the Nasdaq, S&P 500, and Bitcoin will recover at least half of their losses in the coming weeks.