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S&P 500 Is at Risk of a 10% Tumble as Trade Angst Deepens, RBC Says

S&P 500 Is at Risk of a 10% Tumble as Trade Angst Deepens, RBC Says

(Bloomberg) -- The sell-off in U.S. stocks may get uglier as President Donald Trump’s trade war escalates at a time when the market is far from cheap, RBC Capital Markets says.

A 10% correction of the S&P 500 Index from its April peak to 2,650 is becoming more likely, according to strategist Lori Calvasina. The equity gauge is about 4% above that level. Investors should take a more defensive stance, with the firm upgrading utility shares, while cutting its recommendation on commodity producers, she said in a note to clients Friday.

Traders pushed down the value of stocks, with major averages on track for their worst month of the year, after Trump’s threats to place escalating tariffs on Mexico fueled investor anxiety. In addition, a report that China is planning to restrict rare-earths exports left markets set for a turbulent end to what’s been a tough May for risk assets.

S&P 500 Is at Risk of a 10% Tumble as Trade Angst Deepens, RBC Says

“It’s unlikely that a trade deal with China will be reached anytime soon, and Trump’s Thursday evening tweet regarding new tariffs on Mexico seems likely to add to investor angst,” Calvasina wrote. “This waiting game, in the context of crowded conditions and expensive valuations in U.S. equities, makes a 10% retracement (peak to trough) more likely.”

A model tracked by RBC that includes measures such as price-earnings ratio showed stock valuations at a 0.8 standard deviation above the long-term average. Should the index retreat to 2,650, that would erase half the gains from the market’s post-Christmas rally and mark the second time in less than a year that equities suffer a 10% correction.

While Calvasina is sticking to her year-end target of 2,950 for the S&P 500, she’s growing more concerned over the prospects for 2020, when U.S. presidential elections bring policy uncertainty at a time when economic growth is slowing. Gross domestic product is expected to expand 1.9% next year, sitting in a danger zone of 0-2%, where RBC found that stocks have historically fallen two thirds of the time.

The “election is the U.S. equity market’s next big policy hurdle,” Calvasina wrote. “We are starting to worry that 2020 will be a tough year for the stock market.”

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, ;Jeremy Herron at jherron8@bloomberg.net, Rita Nazareth, Randall Jensen

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