A bear market is coming back just in time for summer, according to David Bianco, the chief investment officer of DWS Group Americas.
While the S&P 500 has recovered from its earlier dip on news of trade talks with China and the EU, another steep pullback is in the cards, as Bianco sees a case of “June gloom” on the horizon.
“It’s very possible for us to go right back to the lows,” Bianco told Business Insider. “A number like 5,200 is a real possibility for a summer correction.”
He’s concerned about S&P 500 valuations and doesn’t believe the ongoing stock market rally is sustainable. Valuations are back to their pre-Liberation Day levels, yet earnings estimates have dropped and tariff rates are elevated. With the S&P 500 trading above 5,900 at 23x earnings, stocks are definitely not cheap.
“Even before Liberation Day, the market was very richly valued,” Bianco said. “Valuations are right back to where they were before Liberation Day. The market’s just a few percent off from its high, but almost everybody’s cut their earnings estimate for the year by at least a few percentage points. We did by 4%.”
DWS Group expects tariffs to be 14% on average — significantly higher than the 2.5% rate at the beginning of the year.
With higher tariff rates and economic uncertainty combined with lower earnings, Bianco doesn’t feel like the S&P’s high valuation is tenable.
The interest rate outlook is further stalling a stock market rally. Many across Wall Street are concerned over rising Treasury yields in response to a growing US fiscal deficit and the recent downgrading of US debt — a development that could signal stagflation.
With a trade war damaging international relations, especially with countries that have historically bought US Treasurys, Bianco believes rates have room to rise.
“Trade and the demand for Treasurys go hand in hand. If there’s less trade, there’ll be less demand for Treasurys,” Bianco said. “If we’re going to reduce trade, we need to figure out how we’re going to get Americans to buy Treasurys, and that may require a higher yield.”
Limited upside
Bianco isn’t just warning about near-term correction — the strategist also believes the S&P 500’s gains will be capped for the year. In his opinion, the market is trading at valuations closer to year-end expectations.
“The S&P is overshot,” Bianco said. “We’ve already hit our year-end targets in May already, and investors shouldn’t get their hopes up that we’ll see even more price appreciation.”
In Bianco’s opinion, if all goes well by the end of the year, meaning that earnings growth is strong and the 10-year Treasury yield stays below 4.5%, investors can expect to see the S&P 500 ending the year around 5,800 to 6,000.
“The summer is going to test some of the areas where the S&P was before and see if investors are still confident in the outlook for the economy,” Bianco said.
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How to prepare
The stock market volatility won’t clear itself up overnight, which is why investors need to have a long-term plan.
In light of the tariff volatility, Bianco is underweight on the consumer discretionary, consumer staples, energy, industrials, and materials sectors, as he believes these will be the hardest hit.
“These tariffs have yet to really kick in, and we’ll see to what extent companies try to offset it, how much they pass forward to consumers, and how consumers react to that,” Bianco said. “We need at least six months to figure out what’s really happening here with inflation and what the cost of goods are going to be at big retailers in the coming months.”
Technology may emerge as a bright spot in the economy, as Bianco anticipates the sector will be less rate-sensitive than other parts of the stock market and real estate investments.
Bianco is also overweight on financials, utilities, and healthcare.
Investors can add exposure to these areas of the stock market through funds such as the Invesco QQQ Trust (QQQ), Financial Select Sector SPDR Fund (XLF), Vanguard Utilities ETF (VPU), and iShares US Healthcare ETF (IYH).