Will the S&P 500 fall more than 20% in the near term? A leading economist analyzes the divergence between the broad market and small caps after the June CPI report – SPDR S&P 500 (ARCA:SPY)

The stock market saw a “buy the rumor, sell the news” move on Thursday after softer inflation data sent major averages sharply lower, with the selloff led by mega-caps and big tech.

What happened: The Bureau of Labor Statistics’ June report on consumer price inflation showed that the headline monthly inflation rate came in at -0.1%, the first decline in more than four years, defying expectations for a 0.1% increase. The annual inflation rate cooled to 3% from 3.3% in May, below the 3.1% rate economists had expected.

Monthly and annual core rates slowed to 0.1% and 3.3% respectively, compared to expectations of 0.2% and 3.4%.

The slowdown was aided by a slower rate of increase in housing costs and lower auto and gasoline prices in June.

Commenting on the report, the economist David Rosenberg “For once, the stock market is not enjoying the exceptional CPI reports. Perhaps it is realizing that the data is not really constructive for corporate pricing power or revenue growth.”

See also: Best Inflationary Stocks

Consequences for the market: THE SPDR S&P 500 Exchange Traded Fund TO SPYan exchange-traded fund that tracks the performance of the S&P 500 index, ended Thursday down 0.86% at $556.48, according to data from Benzinga Pro. iShares Russell 2000 Exchange Traded Fund (ETF) IWMan ETF tracking the Russell 2000 index of small caps, climbed 3.59%.

Rosenberg noted the divergence in a post on X, formerly Twitter. There hasn’t been a day like this with the S&P 500 down and the Russell 2000 up since October 2008, the economist said, citing data shared by CNBC. It could be a harbinger of further declines in the broader market in the short to medium term, he suggested.

“The S&P 500 index fell more than 20% over the next five months,” Rosenberg said. A 10% to 20% decline from a recent high is technically called a correction, while a drop of more than 20% is considered to push the market into bear market territory.

Major U.S. index futures were mostly down in overnight trading, suggesting further weakness could be in store on Friday, but expected producer price inflation ahead of the market open could have a say in the market’s direction.

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

Benzinga’s take: History doesn’t always repeat itself, and this time it could be different. Underperforming small-cap stocks of interest-rate sensitive companies are preparing for a breakout and it could happen as soon as the Fed starts cutting rates. Overbought mega-caps could see their buying interest moderate before fundamentals cushion a potential sharp downturn.

Read more :

Image via Shutterstock