S&P 500 Could Fall 25% to ‘Normal’ Value

24/7 Wall St. Insights

• If the S&P 500 resets to its “normal” level, the index will fall 25%.
• Here is what could cause it to reset by such a large amount.
• Also: Dividend legends to hold forever.

The average S&P 500 price-to-earnings (P/E) ratio is about 20. That figure is 28 now and rising quickly. It was much higher when the market collapsed in 2009. It dropped to 11 in 2014. If the index resets to its “normal” level, the S&P 500 will fall from its current 6,000 level to 4,350. That is where it was at the start of the third quarter of 2023. The surge has taken very little time.

What would cause the S&P 500 to reset by such a large amount? In terms of the market, the only likely cause would be a set of poor numbers from Nvidia Corp. (NASDAQ: NVDA | NVDA Price Prediction). The other huge mega-cap companies have announced results. Some may have been disappointing, but none showed that the artificial intelligence (AI) craze that has helped push the market surge is in trouble. Can one stock make the market fall? It would be unusual.

U.S. politics can be crossed off the list for now. The presidential election results drove the market up, and there is no sign that will change.

Where is the danger for the S&P 500? One may be proposed tariffs. If they are large, they will be considered inflationary. Three years ago, high inflation hurt the market. If the consumer price index jumps sharply, that could happen again. The Federal Reserve might have to raise rates, significantly changing the current trend.

There is nearly always some geopolitical risk, mainly if it quickly affects the U.S. economy. This is often due to worries about oil flow from the Middle East, which is unsteady enough to turn into a regional war.

Will the S&P 500 move down sharply?

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