Strategist predicts upcoming stock market correction due to rising rates, inflation, and valuations, warning investors of darker outlook.

With the stock market experiencing a bullish run, many investors are wondering if a correction is on the horizon. According to Sam Stovall, the chief investment strategist of CFRA Research, the S&P 500 is in for a 5% drop. Stovall pointed to several unfavorable factors that could weigh on equity prices in the near future.

One of the key concerns is the bearish setup in interest rates, inflation, and stock valuations. Despite inflation declining, it still remains above the Federal Reserve’s 2% target. This has led central bankers to project only one rate cut by the end of the year. Additionally, higher rates have caused the inversion of the 2-10 Treasury yield curve, a historical indicator of an impending recession.

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Stock valuations are also a cause for worry, with the S&P 500 trading at a 32% premium compared to its average price-to-earnings ratio over the last 20 years. Tech stocks, in particular, are trading at a significant premium of 68%. Stovall mentioned in an interview with CNBC that upward revisions to earnings estimates are needed to justify these high valuations.

The tech sector, which has been a dominant force in the market, could be the first to experience a “crack in the ice,” according to Stovall. With mega-cap tech stocks trading at lofty valuations, there are concerns about the sustainability of their performance.

Other experts, such as elite investor John Hussman, have also warned about the overvaluation of the stock market. One valuation metric suggests that the market is the most overvalued since 1929, which could lead to a significant correction.

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