The S&P 500 has risen about 10% from its intraday lows this month, but investors are likely unimpressed, given that the benchmark index remains down 8% year-to-date.
The sharp sell-off in early April may have caught many investors flat-footed. President Donald Trump’s tariff announcement on April 2 included import taxes much higher than many predicted, increasing the risk that passing along these costs could slow sales or tank corporate profits.
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The post-tariff drop was steep and fast, triggering most investor sentiment indicators to flash oversold and signaling a bounce. Now that stocks have recovered a bit, investors are left wondering what happens next.
While stocks can continue higher, one uncommon signal flashed that could be ominous.
The S&P 500 triggered a ‘death cross’ when the 50-day moving average moved below the 200-day moving average.
Image source: Nagle/Bloomberg via Getty Images
S&P 500 Death Cross can be foreboding
One of the most common ways to measure longer-term and intermediate-term price action is to calculate the average price over the preceding 200 or 50 trading days. In bull markets, the 50-day typically trends above the 200-day moving average, and in bear markets, the opposite is true.
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When the 50-DMA crosses above or below the 200-DMA, it can signal turning points ahead of strength or weakness. When it’s the latter, technical analysts refer to it as a “death cross.”
The S&P 500 suffered its first death cross since 2022 this week and while longer-term returns are solid, investors can suffer substantial short-term losses.
There have been just 24 death crosses since 1950, and the S&P 500 is higher one year later 72% of the time, returning a median of 10.5%, according to LPL Financial.
While that’s encouraging, death crosses have also historically preceded some very poor periods for stock market returns, including when the S&P 500 entered a bear market after a death cross in March 2022.
Similarly, death crosses on the S&P 500 in October 2000 and December 2007 during the Internet Bust and Great Financial Crisis saw maximum drawdowns of 32% and 53%, respectively, according to Nasdaq Dorsey Wright. In the pre-Covid period, the average drawdown following a death cross was 10.4% since 1950.
After a death cross in 2020, the S&P 500 enjoyed a “V-shaped” recovery in the stock market. However, it’s less likely that the government will embrace massive monetary and fiscal stimulus as it did in 2020. The debt burden is much higher today, and the Fed is reluctant to cut interest rates, given that tariffs have increased inflation uncertainty.
Similarly, a “V” recovery after a death cross happened in 2018, but again, stocks were supported by the Fed switching from rate hikes in 2018 to rate cuts in early 2019.
So, while odds may favor higher prices one year out, the shorter-term record isn’t nearly as reassuring, particularly given rising economic uncertainty.
Stocks face headwinds, including valuation
Inflation remains sticky, and tariff-related price increases could pressure consumers even as the job market wobbles. Unemployment is 4.2%, up from 3.5% in 2023, and companies announced 492,000 layoffs last month, according to Challenger, Gray & Christmas, the most in Q1 since 2009.
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As a result, worry that the U.S. economy may be heading toward stagflation or recession has picked up, creating challenges for stocks, which trade on expectations of future revenue and profit growth.
The stock market also remains arguably pricey despite recent weakness, providing less support for gains. The S&P 500’s forward price-to-earnings ratio is about 19, and while that’s down from over 22 in February, it’s still north of the 10-year average of 18.3, according to FactSet.
And that P/E is based on earnings estimates that are likely heading lower after the first-quarter earnings season picks up in the coming weeks.
“You’re going to hear a thousand companies report, and they’re going to tell you what their guidance is,” said CEO Jamie Dimon on JPMorgan Chase’s conference call last week. “My guess is, a lot will remove it.”
If so, Wall Street’s current projection for the full year of S&P 500 companies’ earnings growth of 10.6% may be too optimistic, unless the Fed cuts interest rates or the administration shifts policy.
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