Investing.com – The U.S. dollar could face a significant drop to record lows in a worst-case scenario if economic conditions deteriorate and key market assumptions falter, according to the latest research note from Sevens Report.
Recent market activity has shown that the S&P 500 is trading at a valuation that does not reflect current economic realities, the company said in its latest note.
“This market remains vulnerable to negative shocks to growth, Fed rate cuts, inflation and earnings,” the analysts explained, highlighting the risks facing the index.
Economic data, particularly in the labor market, has shown deterioration in recent months, raising concerns about a possible hard landing.
While the data suggests a soft landing is more likely, a slowing economy does not justify the S&P 500’s current 21X multiple, according to Sevens.
“The economy is losing momentum significantly, and this is simply not an environment that deserves a 20X multiple,” Sevens added.
They believe the key factor will be the Fed’s approach to cutting interest rates. While a 25-50 basis point rate cut in September seems likely, expectations of a 100 basis point rate cut by the end of the year may be overly optimistic, says Sevens. The speed at which inflation falls will determine the Fed’s next steps.
The performance of technology stocks, particularly AI-related earnings, has become a significant driver of the market. The firm adds that with recent disappointing AI trends, tech giants like Apple (NASDAQ:), Microsoft (NASDAQ:), and NVIDIA (NASDAQ:), which make up a significant portion of the S&P 500, could act as a “steady headwind” for the index.
Sevens Research warns that the S&P 500 could see a sharp decline if economic data worsens and AI-related tech stocks continue to disappoint.
“This scenario would fundamentally undermine the assumptions behind the October and July rally, and a significant portion of that rally would not be out of the question,” the firm writes, adding that a drop to the low 4,000 level is entirely possible.
“This scenario may seem a bit extreme given the high valuations of stocks, but it is entirely possible (what if we actually see a sharp decline?) and should be considered the absolute worst-case scenario.”