Stocks are sinking, and these 4 charts suggest a deeper drop might be just getting started

U.S. equities are facing warnings of a deeper selloff, with Evercore ISI forecasting a 7-15% pullback by mid-October, despite expectations of a continued long-term bull market. This outlook is driven by S&P 500 valuations reaching late-2021 highs (CAPE ratio >38), the historically weak August-October period, recent disappointing economic data, and technical indicators showing prior overbought conditions and a rising VIX. Major U.S. indexes closed lower, reflecting these concerns.

Analysis

A confluence of bearish signals suggests U.S. equities face a heightened risk of a significant near-term pullback. Strategists, notably from Evercore ISI, are forecasting a potential correction between 7% and 15% by mid-October, driven by several key factors. Valuations have become stretched, with the Shiller cyclically adjusted price-to-earnings (CAPE) ratio for the S&P 500 exceeding 38, a level last seen in late 2021 before a major market downturn. This elevated valuation leaves the market vulnerable to negative catalysts, which are emerging in the form of disappointing economic data, including a weak July jobs report and ISM services index. Compounding this risk is seasonal weakness, as the August to October period is historically the most challenging for stocks, with September averaging a 1.1% decline since 1928. Technical indicators reinforce this cautious outlook; the S&P 500's 14-day relative-strength index (RSI) recently hit overbought territory above 76, and the Cboe Volatility Index (VIX) is rising from multi-month lows, signaling increased investor anxiety. While the long-term bull market is not viewed as jeopardized, these combined pressures create a compelling case for a tactical de-risking or hedging posture.

Key Decisions for Investors

• Given the forecast for a 7-15% pullback and rising volatility, investors should consider purchasing hedges to protect portfolios against near-term downside.
• Avoid panic-selling core long-term holdings, as strategists anticipate the long-term bull market remains intact and a significant dip would likely attract buyers.
• Monitor key technical indicators, specifically the VIX for sustained levels above 20 and the S&P 500's price action, to gauge the severity and duration of the potential selloff.
• Trim exposure to highly valued or overbought assets and increase cash reserves to maintain liquidity for capitalizing on more attractive entry points during the anticipated market weakness.