Dan Niles predicts when the S&P 500 might bottom, and reveals how he’s profited this year

Hedge fund manager Dan Niles has revealed his outlook for the S & P 500 after the Federal Reserve hiked rates by 75 basis points for the third consecutive time. The founder of The Satori Fund said he expects the index to drop by 30% to 50% from its most recent peak by the end of next year. The S & P 500 hit an all-time high of 4,797 in January this year and has fallen by more than 20% since then. “Our single point target is 3,000 on the S & P,” he said, echoing Morgan Stanley Chief Investment Officer Mike Wilson’s call earlier this year. Niles, who’s also a senior portfolio manager at his hedge fund, said he expects earnings per share for the large-cap equities index to fall to $200 by mid-to-late 2023. He’s also expecting the price-to-earnings ratio to fall to 15 times forward earnings. The most recent survey of analysts by S & P shows EPS is expected to be at $239.03 for 2023, with a PE multiple of 16.13. The long-short equity fund manager said stocks are likely to decline further than the market expects as the Federal Reserve continues to tighten financial conditions, unlike in the past. “The problem is everybody has been conditioned over the last 13 years that every time the stock market goes down, the Fed then reverses itself,” he said. “So that’s what you should be worried about, which is the Fed is going to have to leave rates at a higher level for longer to solve this problem.” Niles also warned that bear market rallies are also likely to occur as the S & P 500 falls to 3,600. “It wouldn’t surprise me to see another one,” he added. How will bonds respond? Rising interest rates are also likely to push bond yields higher (and, consequently, their prices lower). When asked whether he saw the 2-year Treasury yield rising to 5.5%, Dan Niles responded emphatically: “absolutely.” He even suggested that a scenario where yields were above inflation was possible in the coming months. The 2-year Treasury yield was trading around 4.26% Friday, while the 10-year was around 3.695%. U.S. inflation rose more than expected in August , rising 8.3% from a year earlier. On his fund’s performance, Niles said: “We’re up for the year, but it’s not because of our longs. It’s because of our shorts.” Shorting is a strategy which sees investors bet that the price of a stock will fall. Niles said the drop in the stock market earlier this year was due to forward earnings being downgraded ; he expects the next drop to be driven by a fall in company revenues. The hedge fund manager had a stark, yet straightforward, message for investors: “There is nothing that is safe. Stay in cash.”

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