More downside risk for stocks?

One strategist who thinks a downside breakout is more likely is 3Fourteen Research founder Warren Pies. In a note last week, Pies listed three reasons – earnings, rising rates, and the yield curve – as to why October’s lows are unlikely to mark the bottom of this bear market.

Firstly, forward earnings estimates typically stabilise and turn higher three to six months after a market bottom, says Pies. In contrast, estimates are falling right now, and further tightening of financial conditions arising from recent banking turmoil is likely to weigh on forward earnings.

Secondly, the S&P 500 has never bottomed during a rate-hiking cycle. Rate cuts typically follow bear market bottoms, but the Federal Reserve is still hiking rates.

Thirdly, many strategists are talking about how the spread between two-year and 10-year treasury bond yields is deeply inverted – an indicator of a looming recession. Pies is also concerned, saying the yield curve has never remained inverted six months after a major bear market bottom.

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This time may be different, but the last six months “hold very little resemblance to a typical post-bottom environment”, cautions Pies.