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S&P 500 faces downside risk as cash-flow focus grows
A Bank of America says equity risk premiums are at 20-year lows, with cash-flow concerns potentially driving a 7% to 8% correction if negative events hit.
US stock indices have closed lower for the past two weeks, a pattern not seen since March, even as the S&P 500 remains about 3% below its record high. The market has been able to absorb factors including the armed conflict in the Middle East and rising expectations of tighter Fed policy, which have also pushed Treasury yields higher, according to analysis published by Action Forex.
Bank of America, cited by Action Forex, says markets appear to be assuming things are going well and are not pricing in existing risks. The outlet reports that investor expectations for profit margins and five-year forward earnings growth are at record levels, while risk premiums have slipped to 20-year lows, with the lack of fear potentially setting up a 7% to 8% drop in the S&P 500 if adverse events materialize.
Action Forex highlights that the risks it flags include the Middle East conflict and related dynamics, such as a rally in oil prices, higher Treasury yields, and a greater likelihood of a Fed rate rise. It also points to concerns around the return on investment in AI and the high costs companies face to fund research in the area, adding that the shift is pushing investors toward cash flow rather than profit.
The analysis also notes that in the final week of July, more than a third of S&P 500 companies by market capitalization are scheduled to report results, including Microsoft, Meta Platforms, Amazon, and Apple. Action Forex says if cash-flow issues emerge, the broad index correction could extend, while a potential ceasefire and de-escalation could reduce the geopolitical risk premium and support a more stable Fed stance.
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