The Drop Was Epic - But The Bear Market Is Just Starting


  • While the S&P 500/SPX is still officially in correction territory, many market-leading stocks are in a deep bear market.
  • High inflation, Fed tightening, and other unfavorable fundamental factors should continue pressuring economic growth.
  • Moreover, decreasing corporate profits could lead to downward EPS revisions and multiple contractions.
  • While we're due for a countertrend rally, the market will likely continue moving lower in the intermediate term.
  • This idea was discussed in more depth with members of my private investing community, The Financial Prophet. Learn More »

Business chart with red arrow down and dollars background. Loss money. Stock market crash 3d illustration.

JuSun/iStock via Getty Images

We have seen the worst start to a year since 1939 for the stock market. Inflation, global conflict, Fed tightening, and other counterproductive variables have caused the S&P 500/SPX (SP500) to drop by about 15% since 2022 began. However, the 15% figure is highly misleading as many market-leading stocks are now deep in bear markets.

For instance:

  • Facebook (FB) is now down by around 47% from its top last fall.
  • Since the drop last November, Alphabet (GOOG) (GOOGL) has fallen by 25%.
  • Microsoft (MSFT) is down by around 21% in the same time frame.
  • Netflix (NFLX) has fallen by 75% from its high.
  • Apple (AAPL) is down by about 15%.
  • Tesla (TSLA) is down by about 30%.
  • AMD (AMD) and Nvidia (NVDA) are down by about 44% from their highs.
  • And Amazon (AMZN) is down by about 40% from its top.

We're primarily discussing tech stocks here, but that's because the big-tech leadership has been prominent in powering the recent bull market higher in recent years. Also, these names account for more than 25% of the S&P 500's weight, making the tech sector by far the most pronounced segment in the S&P 500. Looking at these declines, we can see that some of the underlying names are deep in bear market territory, while others appear to be just entering a bear market decline. Big tech has led the way up for many years but has recently led the way down instead. Consequently, we see other sectors dipping into corrections or even bear markets recently, and the stock market could continue seeing declines.

SPX 3-Year Chart



While a countertrend rally should occur soon, it may not be sustainable in the current economic atmosphere, and the stock market will probably fall below 4,000 SPX as the year progresses. High inflation, Fed tightening, and other variables should continue pressuring economic growth. This dynamic could lead to a worsening in consumer spending and corporate profits. Lower margins and downward EPS revisions could lead to multiple compressions and even lower stock prices, enabling the SPX to finally find a sustainable bottom at around 3,500-3,200 (base case) in the second half of this year.

Reasons Behind The Decline

I've sounded the caution alarm for a while now, even calling the November tech top before the epic drop came. Big tech stocks and many other companies became vastly overvalued fundamentally and got grossly overbought technically last fall. Furthermore, we saw persistent inflation, and the Fed finally acknowledged that the phenomenon was not transitory. Therefore, we witnessed the Fed announce an aggressive tightening plan.

We continue seeing persistent, high inflation while the Fed raises rates and will start reducing its balance sheet soon. This dynamic of high inflation and Fed tightening is not favorable for economic growth or the stock market. With an 8.5% YOY increase, inflation is sky high in the U.S. Unfortunately, the Fed held interest rates near zero so long that it lost its grip on inflation. We kept hearing that inflation was transitory and could go away on its own. However, prices are spiking, consumer confidence, sentiment, and spending will probably worsen, corporate profits will inevitably decline, and the U.S. could ultimately enter a recession.

Moreover, the recession is not necessarily years away. We could see it begin within the next 12 months, possibly sooner. The stock market is a forward-looking mechanism and could be in the initial stages of a bear market right now.

Sector Performance Tells A Lot

When we break down the market by sectors, we see some telling developments. For one, only three out of the 11 major sectors are in bear market territory right now, information technology, communications, and consumer discretionary. This phenomenon explains the disconnect between the bear market declines in big tech firms and the S&P 500's current correction status.

Three Segments in Bear Markets

Discretionary - Down by 27% from its high last year


Discretionary (

Communications - Down by 30% from its high last year


Communications (

Information Technology - Down by 21% from its recent high

Information technology

Information technology (

Discretionary, information technology and communication are the cyclical growth sectors we would expect to see leading to the declines in the early stages of a bear market. There's less demand for technology, growth, and consumer-oriented names here. As the Fed's raising cycle continues, the economy should slow more, leading to even weaker growth and less profitability. Furthermore, we have high inflation, which also is weighing on margins and corporate profits. Additionally, the consumer is softening due to inflation and higher borrowing costs. Therefore, justifiably, we're seeing substantial declines in the most cyclical growth-oriented sectors.

Financials - Down by about 15% from its high early this year


Financials (

Financials and real estate are down by about 15% and 14%, respectively. We will likely see more declines in financials and real estate as we advance. While these segments are not officially in bear markets yet, they could be soon. It's not surprising to find financials heading south here. The economy is slowing, the Fed is raising rates, the cost of borrowing is rising, and banks could see a wave of write-offs down the line. Therefore, financials' profits and EPS forecasts are not secure here.

Real Estate - Down by 14% from its high late last year

Real estate

Real estate (

We would expect better performance from real estate as the sector is typically considered defensive. However, the substantial declines here imply that housing could be near the top, and the economy is probably facing a more severe and prolonged downturn ahead. As the Fed continues raising the benchmark rate, mortgage rates should climb. This dynamic, coupled with high inflation, should continue pressuring consumers, the housing market, and the real estate sector.

Industrials - Down by 11% from its high early in the year


Industrials (

Industrials are down by about 11% here, and that's because inflation is helping the sector. Industrial equipment and operations essentially go in hand with the materials sector and benefit from higher inflation. However, as the economy slows, the industrial sector could start experiencing more considerable declines due to demand, less profitability, and other issues.

Healthcare - Down by about 9% from its recent high


Healthcare (

Healthcare is a relatively defensive segment, and a muted decline is expected here, for now. The healthcare segment is well positioned for a slowdown as it is subsidized/supported by the government and people will require medicines and treatments regardless of the economic growth image in the broader economy. Nevertheless, this segment also could witness margin, profit, and multiple compression, leading to a further decline.

Materials - Down by about 7% from its recent highs


Materials (

Inflation is helping material stocks here, so this sector is not far off from its highs. Moreover, this segment should continue benefiting from high inflation and is one of the best-positioned sectors for gains as we advance. Nevertheless, we must remain vigilant of the supply/demand dynamic here and monitor the inflation picture as the Fed raises rates. While this segment is well positioned now, if demand weakens or inflation drops off, material names could experience substantial declines.

Utilities - Down by about 6% from its recent ATH


Utilities (

One of the most defensive segments, utilities, is only down slightly from its highs. Market participants often hide out in utilities when volatility increases or an economic downturn materializes on the horizon. However, multiples are relatively high in this segment, especially for the relatively slow growth that it provides. Therefore, as the downturn progresses, we could witness multiple compression in this segment and significant declines.

Staples - About 5% off its ATH


Staples (

Staples is a solid defensive segment and is only 5% off its highs. We expect this segment to do well in times of turbulence or the initial stages of a bear market decline. Therefore, we could continue seeing outperformance in staples-oriented names for a while here. Consumers will continue buying what they need during a slowdown. However, inflation will probably impact margins and profitability in this segment, and we will probably see multiple compression here down the line.

Energy - Around ATHs


Energy (

Energy is the only major segment trading around its highs now. While energy is typically a secular play, the segment benefits from a unique combination of inflation, geopolitical tensions, and supply/demand. Oil could continue higher in this environment, and energy names should continue rising for now. However, we will probably begin seeing demand issues form, and if a drop-off in inflation occurs, this segment could experience steep declines.

The Takeaway



The market has been beaten down badly in a relatively short time frame, and it's approaching the critical 4,000 support level right now. Therefore, if this support level holds, the SPX could have a significant countertrend rally. However, given the slowing economic atmosphere, inflation, Fed tightening, and other counterproductive elements, it's not likely that any substantial rally will be sustainable longer term or will take the major stock market average to new highs.

Segments like big tech, growth, and technology could see substantial short/intermediate-term rebounds if SPX holds 4,000 support. However, we should see lower lows in the stock market as the economy declines. Additionally, sectors that are still in a correction, like financials and real estate, could soon follow technology into bear markets. Furthermore, industrials, healthcare, materials, and other more defensive segments are not immune from further declines.

Inflation is higher than we have seen in decades, impacting consumer confidence, sentiment, and spending. On the other side of the equation, Fed tightening is decreasing liquidity, causing interest rates to risers and increasing borrowing costs. The U.S. economy is highly dependent on the consumer, and a weaker consumer will lead the economy into decline.

Moreover, corporations face higher costs due to inflation and lower margins should lead to less profitability. Decreasing profits should lead to downward EPS revisions and multiple contractions. Due to the high level of inflation, the Fed is not likely to reverse monetary policy soon, and the economy could enter a recession within the next 6-12 months. Therefore, the stock market may be in the initial stages of a bear market right now. Moreover, as the economy slows further, stock market declines should continue, and the S&P 500 could ultimately find its bottom around the 3,500-3,200 level in the SPX. While this target range is my base case for the bear market bottom, we could see a decline to 3,000 SPX or lower in a worse-case outcome.

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This article was written by

Victor Dergunov profile picture
Diversified quality investment ideas

Hi, I am Victor Dergunov! It all goes back to looking at stock quotes in the old Wall St. Journal when I was 16. What do these numbers mean? I thought. Fortunately, my uncle was a successful commodities trader on the NYMEX, and I got him to teach me how to invest. I bought my first actual stock in a company when I was 20, and the rest, as they say, is history. Over the years, some of my top investments include Apple, Tesla, Amazon, Netflix, Facebook, Google, Microsoft, Nike, JPMorgan, Bitcoin, and others.


Disclosure: I/we have a beneficial long position in the shares of AMD, FB, GOOG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own stocks as part of a diversified portfolio with hedges

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