S&P 500 To Plunge More Than 20% Near Term? Top Economist Breaks Down Broader Market Vs. Small-Cap Divergence After June CPI Report – SPDR S&P 500 (ARCA:SPY)

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, economist David 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.”

See Also: Best Inflation Stocks

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 hasn’t 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.