The S&P 500 could plunge 20% in the coming months, with stocks too optimistically priced, says one market strategist

trader worried — JOHANNES EISELE/AFP/Getty Images

S&P 500 could fall by as much as 20% in the coming weeks, Tim Hayes, senior strategist at Ned Davis Research, told Business Insider.
He said: "I would expect a decline of 15-20% and then we get a rally that maybe leaves us back where we are around now."
All three major Wall Street indices fell last week due to a sell-off in big US tech stocks.
He said: "Right now the valuations and sentiment have priced in a much better economic and earnings outlook than we are seeing."
But he expects stocks to pick up after November once the US election is over.
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The S&P 500 could fall by another 15-20% in the coming weeks, and although it will recover, it is unlikely to rise much beyond current levels, suggesting that a top may be in place, according to one strategist.

The index has hit record highs this month, in a year of volatile trading, driven by technology stocks, and it is this sector that is likely to fuel any steep declines.

"The average change in the S&P 500 over the last 100 days is 1% and that tends to be consistent with sharper moods in the market," Tim Hayes, senior investment strategist at Ned Davis Research told Business Insider.

He added: "I would expect a decline of 15-20% and then we get a rally that maybe leaves us back where we are around now. That would be my best expectation."

The S&P 500 is down almost 4% on a weekly basis, having fallen for two straight weeks.

The VIX volatility index which tracks the volatility of options on the S&P 500, hit a three-month high on September 3 at 33.60. While it is down 16% in the last week the VIX has risen almost 27% in the last month, indicating heightened investor nervousness.

Tech stocks, as reflected by the Nasdaq, have fallen by 10% since hitting a record earlier this month. "Some of these stocks have had pretty big declines, so they will continue to weigh (the market) down. You will start to see the broader indexes decline as well," he said.

Tesla, run by billionaire Elon Musk, which has so far risen more than 650% in the last 12 months, fell as much as 21% on Tuesday partly due to the broader tech-decline and because of its surprise exclusion from the S&P 500 Index.

The electric car producer had met the eligibility criteria but, surprisingly, did not make the cut.

The S&P 500 index has risen around 50% since touching coronavirus lows in March, helped by a boom in tech stocks and rock bottom interest rates. And Hayes said he feels many stocks are still priced far more optimistically than they should be, given the backdrop of an economy still technically in recession and millions out of work.

"Right now valuations and sentiment have priced in a much better economic and earnings outlook than we are seeing and than what is coming through the numbers. That is becoming a motivation for the momentum selling to pick up," he said.

Hayes said the S&P 500 will stage a rally later once the US presidential election in November is out of the way.

"Usually when you get to October the selling pressure tends to [loosen] and you can expect some end of year rally," Hayes said. "Once you get past the US election the uncertainty will clear up and by then market valuations may look better," he concluded.

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