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S&P 500 trading down to 3,200 ‘is very attainable,’ strategist says

Miller Tabak Managing Director and Equity Strategist Matt Maley joins Yahoo Finance Live to discuss stock futures, inflation, the impact of Fed Mester’s 75 bps hike proposal, and the outlook for the broader market.

Video transcript


- Welcome back, everyone. The Federal Reserve's Loretta Mester saying that, if economic conditions remain the same when central banks meet in July, she will be pushing for another 75 basis point hike to interest rates.

For more, let's welcome in Matt Maley who is the managing director and equity strategist over at Miller Tabak. What implications would that have if we saw another 75 basis point?

And even now, as we're seeing that start to get priced in perhaps more broadly in the markets, what is your expectation for where this could fall once the next FOMC meeting concludes?

MATT MALEY: Yeah, I mean, the Fed is-- The thing is, a lot of people spend a lot of time blaming the Fed for missing out on being late in the inflation and the transitory issue of last year. And it's something I was talking about at this time last year, saying the Fed needed to react more quickly.

But the thing is, at the end of the year, and certainly the beginning of this year, they told us what they're going to do. And so people seem to be surprised at the reaction in the markets. Well, they're telling us again what they're going to do.

I mean, they're cuffing it a little bit by saying, we'll see how the data is. But they've been pretty darn emphatic about that their number one plan is to fight inflation and that if it hurts the economy, that's OK because it's more important to fight inflation.

And that's one of the reasons I think we have to worry that the stock market has to come down a little bit more.

- Matt, I'm going to try very hard not to ask you for chart analysis on Bed Bath Beyond. I think I know what that chart certainly says after this morning's action. But look, to your point, I mean, how much downside risk do you think there's left in the broader market?

MATT MALEY: Oh, gosh. I think there's a good chance we trade down to 3,200, I guess, on the S&P is very attainable.

I mean, the thing is that people keep saying that the earnings, I'm sorry, the recession is getting priced into the stock market. I think it's just barely beginning to be being priced in.

What happened the first half of the year, this big decline, all that really did was take away, or price in, the revaluation of the stock market. With the Fed no longer providing that excess liquidity, we could no longer have those historically high, I mean, second most high level valuations ever, and by some measures the most overvalued ever.

So we're really just getting down more and more in line. However, right now, if you look at the estimates that we're looking at right now, about $228, $229 is a consensus estimate for the S&P 500. That puts you at 16.7 times earnings.

But what happens if those earnings have to come down, which I think is very, very likely? We're probably trading more like 18 times earnings, which is far from fair value.

Whenever the market sells off from highly overleveraged and overvalued level, it usually overshoots to the downside. So I just think that we have more to price in. I'm not really sure why these analysts haven't been lowering their numbers.

In fact, the people say they blame the Fed for being way too late to react to inflation last year. These analysts are being way too late this year, to react to what's going on in the economy.

- I guess we're sort of used to the analyst being late on these kinds of downgrades, Matt. So give us some specifics here. Translate that into how much more downside we could see.

MATT MALEY: Yeah, again, I think 3,500 is an easy target. I think that's what some of the bears, people a little bit more bearish on Wall Street, are looking for.

I think because we tend to overshoot whenever we go through-- Again, people have to remember, we're still in a deleveraging process as well. This is not just a revaluation. But the market, we had the most leverage as measured by margin debt ever.

And as that leverage has unwound, which still has more to go, we'll probably overshoot to the downside. So I think 3,200 on the S&P 500 is something that we could reach at some point this fall.

- And Matt, everybody is talking about technology, watching technology as a leader down, could they be a leader back out. You're watching the bank stocks, which I think is really interesting here as to what they could tell us about what's going to happen broadly in the market.

MATT MALEY: Yeah, one of the things, I mean, they've seen a nice little bounce here in the last week or so. The stress tests were better than expected. I don't want to say better than expected. They were positive. And I think people did expect them to be positive.

We've seen some nice dividend increases. So that's good. And that's kind of helped the group bounce. But I mean, really, before the stress test announcement came in, they were very close to testing their May lows. This was a concern for me.

And the reason why it is, is that, even though the banks were not concerned anywhere near what we were back in 2008, they're in are much, much better shape. However, that interest margins, that's really important.

And with the yield curve flattening, and very close to inverting, that hurts their net interest margins. It doesn't mean that we have to worry about the banks going out of business or anything like that. But you know, again, the tech group, as you mentioned, Julie, is the most important group to follow.

But keep a close eye on the banks as well because if the yield curve remains flat, and especially if it inverts, that's going to be tough for the banks. And it's going to be very hard for the market to bounce back in a big way if the bank stocks are having a tough time.

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