The S&P 500 is still 20% down

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  • Interactive Brokers founder Thomas Peterffy is bearish on stocks over the next few quarters.
  • The billionaire thinks the US economy will suffer from stagflation.
  • Peterffy sees 3,000 as the bottom of the S&P 500.

Thomas Peterffy, the billionaire founder of Interactive Brokers, does not see the Federal Reserve succeeding in its goal of bringing inflation back to its long-term target of 2%. Instead, he sees the consumer price index struggling to fall below 4.5%.

This does not mean, however, that the Federal Reserve will remain committed to controlling inflation, as it has promised. The most likely scenario, Peterffy said, is that they leave the fed funds rate between 4 and 5% (its cap is currently at 3.25%) as external pressure to stop raising rates gets stronger.

The result, Peterffy said, will be a continued stagflationary environment — a period of below-trend economic growth thanks to high interest rates and above-trend inflation. The US economy is already in such a situation, with negative GDP growth in the first two quarters of this year and CPI still at its highest level in four decades, above 8%.

For equities, this will be catastrophic over the next few quarters, Peterffy believes, as high rates and high inflation will weigh on corporate earnings more than investors currently expect.

Investors are “not factoring in the lower profits we’ll get from lower demand,” Peterffy told Insider on Friday. “There will be more unemployment – I expect it to be 4.5-5% – so there will be less consumer spending, and that’s what will translate into lower business income .”

Ultimately, Peterffy expects the S&P 500 to fall to 3,000 by next summer. With the index closing Friday at around 3,745, that’s about a further 20% downside.

“I discount revenue by about 20% from where it should be today, and I apply a multiple of 15 to that and I come out with 3,000, more or less,” a- he declared.

Peterffy’s views in context

Peterffy, who according to Forbes is the 80th richest person in the world and whose company manages $287 billion in assets, joins other big names in calling for another substantial drop in shares.

Some of those names include Ray Dalio, the founder of the world’s largest hedge fund, Bridgewater Associates; Jeremy Grantham, the GMO founder who called the stock market crashes of 2000 and 2008; and Scott Minerd, founding partner and CIO of Guggenheim.

Dr. Nouriel Roubini, professor emeritus at New York University’s Stern School of Business, also made comments this week reflecting Peterffy’s call for the Fed to back down from its hawkish stance, resulting in a stagflationary environment.

“The Fed will have to chicken out,” Roubini told Bloomberg. “You will have a severe recession and you will have a shock in the financial markets.”

Roubini continued: “I don’t believe central banks when they say ‘we’re going to fight inflation at all costs’ because they have the illusion of a soft landing or a hard landing which is short and superficial. .”

Deutsche Bank, whose economists were the first on Wall Street to predict a recession in early 2023, also said in a note to clients on Monday that investors were not sufficiently factoring in the risks of stagflation.

“Markets overlook the fact that we are increasingly at risk of reverting to prolonged 1970s-style stagflationary momentum, which would require an even greater interest rate reaction. If the experience of the 1970s repeats itself, investors expect a prolonged period of negative real growth in yields for bonds and equities,” Henry Allen, an analyst at the bank, said in the note.

S&P Global also issued a stagflation warning this week and said it could derail the economy.

“If the Fed’s continued efforts to rein in inflation fail, the U.S. economy could face a hard landing and monetary tightening beyond current expectations could lead to a deeper-than-expected recession,” they said Wednesday. analysts from the financial analysis company. They added that stocks could fall another 14% by mid-2023.

While some Wall Street strategists remain more optimistic than the examples above, some of the most bullish on the street have recently shown signs of capitulation.

John Stoltzfus, chief US equity strategist at Oppenheimer, recently lowered his S&P 500 price target for 2022 from 4,800 to 4,000. Goldman Sachs’ David Kostin, meanwhile, fell to 3,600 in September from 4,300 , after starting the year with a target of 5,100.

Whether stocks fall further or not, uncertainty seems to paralyze the market. Rallies have been continually hampered by the realization that the Fed is going to have to raise interest rates higher than investors had originally expected.

Until this uncertainty dissipates, a cautious approach may serve investors.

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