The benchmark S&P 500 index has recovered nearly 10% in recent weeks after President Trump agreed to a 90-day pause on almost all tariffs other than the ones imposed on China.
Additionally, the White House exempted electronic devices from aggressive tariffs as well.
Still, if the US economy slides into a recession, as many believe it would by the end of this year, the benchmark index could crash to a low of 3,700, according to a senior analyst at Wolfe Research.
The firm’s forecast translates to about a 33% decline in SPX from current levels.
Why is Wolfe super bearish on the S&P 500 index
Wolfe analyst Chris Senyek warns of a sharp downside in the S&P 500 index even if the US sees a “mild” recession in the back half of 2025.
According to Senyek, Trump’s steep tariffs and the subsequent retaliation from other nations could result in a significant hit to corporate earnings this year.
Consequently, the benchmark’s EPS estimates will come down by as much as 15% from the current $266, “in line with the median EPS peak to trough over the past four recessions, of 16.7%,” he told clients in a research note this week.
Note that SPX is already down some 10% versus its year-to-date high in February.
Q1 earnings season has so far been encouraging
A material uncertainty-driven hit to corporate earnings could translate to multiple contractions in 2025.
“If we apply the 15Y average price-to-earnings (P/E) of 16.6x to recessionary type EPS of $225, this implies about a 3,700 level for the S&P 500 in a mild recession,” Senyek added in his report.
That said, the first-quarter earnings season has kicked off on a positive note.
Nearly 160 S&P 500 companies have reported so far, of which 76% have come in ahead of expectations.
Plus, the blended growth rate currently sits at 8%, meaningfully above the 7.2% that experts had forecast at the end of the calendar Q1.
SPX has recently formed a death cross
Investors should note that Senyek’s forecast assumes a mild recession only.
If a severe one hits the economy instead, the ramifications for the benchmark index could be even more dire.
Even in the near term, the S&P 500 stands to relinquish its recent gains as the dreaded “death cross” has recently appeared on its daily chart.
A death cross is when an asset’s 50-day moving average (MA) falls below its longer-term 200-day moving average, and it often indicates bearish momentum ahead.
However, not everyone on Wall Street is as dovish on the SPX as Wolfe Research.
Oppenheimer, for example, continues to see upside in the benchmark index to the 5,950 level, which indicates potential for another 10% gain from current levels.
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