Why this strategist thinks the S&P 500 could drop by nearly 1,000 points

Market Outlook & Economic Concerns - Consumption is expected to slow down in the second half of the year [2] - Real wage income may face pressure due to hours worked and hourly earnings [3] - Big tech core businesses are sensitive to economic slowdown, potentially leading to negative operating leverage [3] - Stagflation, though not as severe as in the 1970s, could put the Federal Reserve in a difficult position [4] - Bull market psychology is present but prone to sudden breaks, with several risks in the latter half of the year [7] Inflation & Monetary Policy - Core PCE inflation is projected to be near 3% into the first half of 2026, which is not aligned with the Federal Reserve's goals [3] - The market may need to adjust expectations for rate cuts in 2026 [4] - There is a potential conflict between the Federal Reserve's desire for low inflation and the President's preference for a "red-hot" economy with strong nominal growth [13] S&P 500 & Potential Correction - The S&P 500 could potentially decline to 5500 in a significant economic slowdown, representing a mid-teens correction [9] - A milder correction could see the S&P 500 at 5750, a roughly 10% decrease [9] - Economic profits versus enterprise value to invested capital are close to levels seen in late 1999 before the market downturn [10] Investment Strategy - Investors should consider defensive, value-oriented sectors like beaten-up healthcare, waste companies, and utilities [14] - Caution is advised against being overly bullish, especially with cash needed within the next year [12]