The S&P 500 Is Falling Again. Here’s How Much Further It Could Slide.

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The S&P 500 is falling, and if it doesn’t hold at a key level, more declines could be on the way. For those looking for a chance to get into the market, that might be a good thing.

The index has dropped about 2% from its closing high this year of 4588, which it hit at the end of July. That includes Tuesday’s drop, which was precipitated by news out of China and the U.S. banking sector.

First, China’s exports fell more than expected in July from one year ago, a sign that global demand is weakening. At home, Moody’s Investors Service downgraded its ratings for some U.S. banks, saying that high interest rates are eating into profitability. The stock market fears that more constraints on lending will follow, which could limit spending in the economy. 

These economic risks are sure to knock down what has been a soaring market. Despite its recent drop, the

S&P 500
is up double digits from its October low point. Its forward price/earnings multiple has risen to about 19 times from around 15 times at the start of the rally, making the index more expensive. That means the market, which is reflecting optimism about corporate profits, has a lot to lose from any risk to the economy.

The S&P 500 is down just under the 4500 level. That is roughly where buyers have stepped in several times over the summer to send the index higher. If those buyers come in again, the index may be able to avoid steeper losses. But if investors give way to selling pressure, they open the door to further declines. 

Enough selling pressure could push the S&P to 4300, a level it last saw in June. It’s a key level because, for about 10 months leading up to June, there just weren’t enough buyers to send it higher, until it hit a breakout moment. This time around, the market could drop to that point, where bulls hope it can stabilize, unless the economic outlook worsens.

“We have more evidence that a top has occurred, and stocks will likely be headed lower over the coming weeks,” wrote John Kolovos, chief technical strategist at Macro Risk Advisors. “A move to the 4300 for S&P 500 is growing in probability.” 

Whatever happens, the market is likely experiencing a healthy pullback, rather than the start of a new bear market. A fall to 4300 would represent a roughly 6% pullback from July’s closing high. That kind of dip is normal during larger bull markets.

There are always risks to the economy and corporate profits, but inflation has cooled, and the Federal Reserve appears to be close to the end of its interest rate hikes. Companies are still adding employees, and the expectation is that a growing economy will bring about earnings growth next year, despite the Moody’s downgrades to the credit of some banks.

The question is whether to aggressively buy the dip now or do more buying once the market has tumbled some more. 

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com