Charts Hint at Bigger Market Decline

Stock Valuations Soar as Market Faces Historically Weak Season

U.S. stocks have stumbled since early August, and Wall Street strategists are warning the slide may deepen.

Julian Emanuel, chief equity and quantitative strategist at Evercore ISI, expects a 7% to 15% pullback by mid-October. Deutsche Bank strategists also foresee weakness, though they anticipate a more moderate decline.

Despite near-term risks, Emanuel believes the long-term bull market remains intact and says deeper drops could attract dip buyers. Instead of selling outright, he recommends investors consider hedging strategies to protect portfolios.

Valuations Back at Extreme Levels

The Shiller CAPE ratio — a cyclically adjusted P/E metric — recently topped 38, its highest since late 2021.

That previous peak preceded the S&P 500’s worst year since 2008 as the Federal Reserve’s aggressive rate hikes triggered a market rout. While Emanuel doesn’t expect a repeat, elevated valuations leave stocks vulnerable to negative surprises.

Seasonal Weakness Ahead

The stretch from August to October is historically the weakest for U.S. equities, according to BTIG’s Jonathan Krinsky.

Although the relative strength index has cooled from overbought territory, it remains elevated — a signal that the current downturn could extend, noted Mark Hackett of Nationwide.

Volatility Starting to Rise

Wall Street’s “fear gauge,” the Cboe Volatility Index (VIX), is rebounding from its lowest level since January. Emanuel sees this as mean reversion, implying volatility could continue climbing in the weeks ahead.