Why This Bullish Analyst Warns Of 7% Drawdown In S&P 500 After Possible 'Minor New High' This Month

U.S. stocks have started the year on a lackadaisical note, and even a bullish market analyst has now issued a word of caution to investors.

What Happened: The S&P 500 Index, which had a great year in 2023, hasn’t seen much change in January. The SPDR S&P 500 ETF Trust SPY, tracking the S&P 500, only lost about 0.1% this year. On Tuesday, it ended at $474.93, down 0.37%, according to Benzinga Pro data.

Speaking on CNBC’s “Last Call,” Tom Lee from Fund Strat said he’s still hopeful for the year but mentioned a potentially bumpy first half. He pointed to recent comments from Federal Reserve Governor Christopher Waller, who said inflation is close to the 2% target but cautioned against expecting a rate cut too soon.

Lee said, “With Fed governors talking about not sure how many cuts they want to do that’s gonna make markets nervous.” He also noted that the Empire State manufacturing survey gave out a “pretty lousy” reading. The business conditions index, an indicator of regional manufacturing activity in New York state, came in at -43.7 for January, the lowest reading since May 2020. A reading below “0” suggests contracting activity,

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“So I think it’s possible that we make a minor new high before the end of the month and then we might have something like a 7% drawdown,” he said.

Why It’s Important: While the S&P 500 had a great 24% increase in 2023, it’s been uncertain in January due to questions about the Fed’s plans. Initially, traders expected three rate cuts after the Fed’s December meeting, but the released minutes reduced those hopes. Economic indicators on growth and inflation have also made people doubt the Fed will reverse rate hikes.

The upcoming earnings season is likely to be important for stocks and the overall market in the short term.

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