Current S&P 500 correction has further to run - Evercore ISI

After weeks of a relentless upward march, the S&P 500 experienced a pullback in recent days as sticky inflation data dealt a major blow to early interest rate cut hopes. Commenting on the recent developments, analysts at Evercore ISI said the ongoing market correction has further room to run.

S&P 500 pulls back from highs on sticky inflation

The latest sell-off in US stocks began last week when disappointing earnings from major banks and higher-than-expected inflation data for March weighed on risk sentiment among investors.

The main culprit was the latest consumer price index (CPI) report, which rose 0.4% in March, pushing the annual inflation rate to 3.5%, up by 0.3 percentage points from February, as reported by the Labor Department’s Bureau of Labor Statistics.

These figures were higher than the 0.3% monthly increase and the 3.4% annual rate economists surveyed by Dow Jones had anticipated.

The core CPI, which excludes the more volatile food and energy prices, also saw a rise of 0.4% month-over-month and 3.8% year-over-year, surpassing forecasts of 0.3% and 3.7%, respectively.

The report showed that inflationary pressures remain sticky, suggesting that the Federal Reserve may not be in a position to cut interest rates any time soon.

As a result, each of the three major indices dropped over 1% last Friday, ending the week with losses. The S&P 500 recorded its largest weekly percentage drop since January, and the Dow Jones Industrial Average experienced its most substantial weekly decline since March 2023.

The indices also posted declines on a weekly basis, with the S&P 500 index sliding by 1.56%, while the Dow Jones tumbled 2.37%. The Nasdaq managed to contain its losses, decreasing by only 0.45%, as technology stocks showed resilience.

Market correction to continue says Evercore ISI

Amidst recent market declines, the NASDAQ Transportation Index, which measures all Nasdaq stocks within the transportation sector, saw a sharp drop, breaking below its 200-day moving average (DMA).

This, according to Evercore ISI analysts, represents a broader issue because it fails to confirm the Industrial Average strength, which just recently made a new all-time high.”

“Charles Dow, namesake of the DJIA, would have identified such a divergence as a harbinger of a downshift in the Economy’s torrid pace, or at minimum, as we believe, a sign that the current market correction has further to run,” analysts added.

The latest print by JB Hunt Transport Services (NASDAQ:JBHT) has negatively impacted the entire transportation sector, Evercore noted, as identifying a demand catalyst remains challenging and severe overcapacity has led to aggressive pricing competition.

Conversely, United Airlines' (NASDAQ:UAL) earnings release has provided a lift to the airline industry, bolstered by a strong first quarter and a balanced capital allocation strategy that has alleviated concerns about aircraft delays, regulatory pressures, and rising fuel costs.

To date, 54 companies from the S&P 500, representing 12% of the market's capitalization, have reported their results for the first quarter.

Sales have grown by 4.4% and earnings by 6.0%, surpassing expectations by 1.1% and 8.5%, respectively. These results set the trajectory for an overall sales growth of 3.4% and earnings growth of 1.0% for the period, Evercore analysts highlighted.

This article first appeared in Investing.com