S&P 500 To Plunge More Than 20% Near Term？ Top Economist Breaks Down Broader Market Vs. Small-Cap Diverge

　　The stock market had a “buy-the-rumor, sell-the-news” move on Thursday after a tamer inflation data sent the major averages sharply lower, with the sell-off spearheaded by mega-caps and big techs.

　　What Happened: The Bureau of Labor Statistics June consumer price inflation report showed that the month-over-month rate of the headline inflation came in at a negative 0.1%, the first drop in more than four years, defying expectations of a 0.1% rise. The year-over-year rate cooled off to 3% from 3.3% in May, below the 3.1% rate forecast by economists.

　　The core monthly and annual rates slowed to 0.1% and 3.3%, respectively, as opposed to expectations of 0.2% and 3.4%.

　　The slowdown was facilitated by a slower rate of increase in shelter costs and prices of autos and gasoline falling in June.

　　Commenting on the report, economistDavid Rosenberg said, “For a change, the stock market doesn't like a stellar CPI report. Maybe it's realizing the data aren't exactly all that constructive for corporate pricing power or top-line growth.”

　　Implications For Market: The SPDR S&P 500 ETF Trust SPY, an exchange-traded fund tracking the performance of the S&P 500 Index, ended Thursday down 0.86% at $556.48, according to Benzinga Pro data. However, the iShares Russell 2000 ETF IWM, an ETF tracking the Russell 2,000 Index comprising small-caps, climbed 3.59%.

　　The divergence was noted by Rosenberg in a post on X, formerly Twitter. There hasnt been a day like this with the S&P 500 down size and the Russell 2000 ripping since October 2008, said the economist, citing data shared by CNBC. This could be a premonition of a further sell-off in the broader market over the near- to mid-term, he suggested.

　　“The S&P 500 went down more than 20% over the ensuing five months,” Rosenberg said. A 10-20% pullback from a recent high is technically called a correction, while a slump of over 20% is said to push the market into bear-market territory.

　　The major U.S. index futures mostly fell in overnight trading, suggesting more weakness could ensue on Friday but the producer price inflation due ahead of the market open could have a say on the market direction.

　　The futures market, however, has begun pricing in a more than 92% probability of a rate cut at the September meeting.

　　Benzingas Take: History may always not repeat itself, and this time, it could be different. Underperforming SMID-cap stocks of interest-rate sensitive companies are priming for a breakout and this could happen as soon as the Fed begins lowering rates. The overbought mega-caps could see some moderation in buying interest before fundamentals cushion any potential sharp downturn.

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