Wells Fargo’s Harvey warns S&P 500 is set for a 10% correction

The bank’s head of equity strategy expects the S&P 500 to suffer a 10% correction in the next three to six months. That would take the American stock benchmark to around 3,700, which is near the November lows. Wells Fargo maintained its year-end price target of 4,200 —  or about 2% above Monday’s close.

“In our view, equity downside will be driven by worsening economic conditions, a function of: aggressive monetary policy; potential capital/liquidity issues catalyzed by the bank crisis; and a consumer that is increasingly reliant upon credit to sustain spending,” Harvey and his team of strategists said in a note to clients Tuesday.

‘Economic Malaise’

The “economic malaise” expected by the firm prior to the collapse of Silicon Valley Bank last month has moved toward an outright recession in the second half of the year, Harvey said, adding the yield curve inversion and increasing reliance by consumers on credit have contributed to the bearish reversal in the bank’s view on stocks.

US equities were largely unscathed in the first quarter of 2023, even as investors faced rising recession fears, warnings about an earnings rout and an unprecedented bank crisis.

The S&P 500 is up roughly 7% this year, driven by a drop in Treasury yields and a perceived pivot by the Federal Reserve on interest rates, according to Wells Fargo.

But the recent rally has started to lose steam as investors await a murky earnings season and concerns around the financial system linger.

“If we assume the Fed tightening cycle ended in March (that’s still a coin toss), the near-term relief rally appears already reflected in stocks,” Harvey wrote. “Typically, the market continues to rally over a three-month period; however, it may not be a fair comparison because the tightening cycle may not be over and margin compression is expected to outweigh a Fed pivot.”