S&P 500 to correct to ~5,250 no later than Q3, Stifel’s Bannister predicts

Published 02/06/2025, 13:20
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Investing.com -- The S&P 500 is likely to peak in the second quarter of 2025 and then undergo a correction to approximately 5,250 by the third quarter, according to Barry Bannister, chief equity strategist at Stifel.

“We forecast the S&P 500 rally since the Apr-7 intra-day low of 4,835, which has been mostly led by Big Tech, corrects to ~5,250 no later than 3Q25 and (depending on Fed and trade policy) ends 2025 at 5,500,” Bannister said in a Sunday note.

The expected drawdown reflects a combination of slowing consumption, a lull following front-running of tariffs, and reduced capital spending amid policy uncertainty.

Bannister forecasts a correction of about 10%, roughly half the magnitude of the January-April 2025 decline. He sees real personal consumption “catching down” to already sluggish real personal income from employment as the personal savings rate increases.

Weaker economic conditions are also seen weighing on earnings and valuation. Bannister expects S&P 500 forward earnings per share (EPS) growth to decelerate to 3.3% year-on-year by December, with earnings reaching $262.50 in 2026.

At the same time, tighter financial conditions are likely to limit the market’s price-to-earnings (P/E) expansion, contributing to the index’s pullback. Bannister highlights that P/E ratio of 20 to 21x based on forward earnings of $262.50 implies a level of 5,250 to 5,500 for the S&P 500 in the second half of 2025.

Against the current backdrop, the strategist and his team reiterate their preference for “Defensive Value” (DV) stocks, which they say outperformed Big Tech-dominated “Cyclical Growth” equities during the previous correction and could do so again if macro headwinds persist.

“Because we see the GDP slowdown gathering pace in 2H25 (but not a recession), along with sticky inflation, we believe investors should retain an overweight in DV,” Bannister explained.

Stifel expects S&P 500 returns to be increasingly constrained by rising Treasury yields and widening credit spreads.

The broker argues that valuation becomes more sensitive when markets are trading at elevated or depressed levels, and forecasts that total returns for the index will weaken in "waves" throughout the 2025 to 2035 period.

This long-term outlook reflects a structural bias toward higher 10-year yields and tighter financial conditions, which may pressure equity multiples and investor appetite.

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