Stock prices in the S&P 500 deemed excessively low: what's the timeline for a market correction?

The stock market, particularly the S&P 500, is currently experiencing a rally, driven primarily by the anticipated interest rate cuts by the US Federal Reserve. Investors believe that lower borrowing costs will stimulate economic growth and boost equities, creating a positive market momentum. This optimistic outlook is further reinforced by analyst price targets from major banks like Deutsche Bank, Barclays, Wells Fargo, Goldman Sachs, and Morgan Stanley for 2026.

However, this rosy picture is not without its risks. Weak labor market data and contained inflation increase expectations for these rate cuts, but they also pose potential negative impacts from AI developments, trade tensions, and economic slowdown warnings. It's worth noting that the rally is currently concentrated mainly in a few large tech companies, which could be a concentration risk.

The US labor market data has been a point of concern, potentially a disaster for Trump, and the revised job data for June was revised down to -13,000. These figures increase expectations for interest rate cuts, but they also signal potential economic challenges.

Investors are preparing for a potential decline in the S&P 500 index due to a possible recession. Charlie Bilello has presented a chart showing this historical perspective, demonstrating that the average decline for the S&P 500 in a bear market would be approximately 34 percent, corresponding to a level of 3150.

However, there is a question about whether there will be a repeat of a bear market rally, at least in a smaller form, like after the sell-off of stocks in June 2022. Many market participants still believe in the scenario of a soft landing, despite the current lows in stocks and bonds.

The market volatility in terms of speed is currently high, but thousands of professional investors are waiting for surprising news or an unexpectedly positive inflation figure to trigger a potential bear market rally. It's worth noting that options, such as put options, have a limited lifespan, making it a challenge for investors to hedge for a big drop in the S&P 500.

Interestingly, only three percent of stocks in the S&P 500 are currently trading above their 50-day moving average, a historically low level. On the other hand, the strong US labor market seems to be a counter-indication for a recession, making a soft landing more plausible.

Inflation expectations are falling rapidly, almost back to the usual level in the 5-year perspective. This could be a positive sign for the economy, as it indicates a return to more stable economic conditions. The cycle of new inflation data is about to begin, both east and west of the Atlantic, providing more insights into the economic landscape.

Lastly, it's important to note the strong US dollar's potential impact on the financial system and the US export industry. It has become a global threat, adding another layer of complexity to the economic outlook.

In conclusion, while the stock market is currently experiencing a rally, there are significant risks and challenges ahead. Investors and analysts will be closely watching economic indicators, inflation data, and geopolitical events to gain a clearer picture of the market's direction in the coming months.