Analysis: Whispers of S&P 500 bear market grow louder as U.S. stock decline continues

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Expectations of a hawkish Federal Reserve are dimming Wall Street’s outlook for stocks, with some investors now bracing for a potential bear market in the benchmark S&P 500 index.

A bear market - often thought of as a 20% or more decline from a high - would mark the end of the pandemic-era rally that sent stocks to record levels on the back of unprecedented stimulus from the Federal Reserve.

Bearish sentiment in a weekly poll taken by the American Association of Individual Investors stood at 52.9% the week that ended May 4, well above the average rating of 30.5%, while BofA’s survey of fund managers last month showed optimism regarding global growth at an all-time low. The Federal Reserve announced a 50 basis point hike last week and signaled that it will raise rates by 50 basis points at its next two meetings. Investors are currently pricing in a total of 209 basis points in tightening this year, putting the central bank on track for its most aggressive tightening path since 1994.

"It’s conceivable the S&P 500 needs to establish a bottom" that would take it into a bear market, given that the index hit 70 new records last year without more than a 5% pullback, he wrote Friday. Analysts at Truist Advisory Services downgraded their market targets last month but have not grown more negative in the most recent decline, wrote Keith Lerner, the firm's co-chief investment officer.

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