Market is entering one of the year’s toughest periods: Sam Stovall

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The next three months may be anything but calm.

CFRA’s Sam Stovall warns the market is entering one of the toughest periods of the year. 

“The third quarter is by far the weakest of the four quarters of the year — gaining only 0.5% on average,” the firm’s chief investment strategist told CNBC’s “Trading Nation” on Monday.

Stovall builds his case based on data going back to 1945. During the other quarters, he finds, the S&P 500 sees average returns of 2% to almost 4%. 

His analysis comes two days before 2020’s second half begins and while coronavirus infections rise. 

“The biggest risk is the number of cases of the Covid virus spiking once again, because of the cascading effect that it would have on corporate profits and the uncertainty that it would present toward the election in November,” Stovall said.

Despite 2020’s unprecedented downturn, Stovall says he believes the weaker historical trend will apply this year, too. He contends the market pullback that began on June 8 hasn’t ended yet.

“We’ve been stumbling along the way. We had a 7% pullback,” he said. “Sometime in the third quarter we end up concluding this correction with a little deeper sell-off.”

His S&P 500 level to watch is 2,850, which implies another 7% drop based on Monday’s close.

But earnings season may buy investors some time.

According to Stovall, second-quarter earnings estimates are so low, they should beat the Street and serve as a short-term bullish driver. So, July may emerge as a stronger month for the market with August and September seeing the most trouble. 

Yet, his forecast isn’t all doom and gloom.

Stovall expects the market and economy to successfully recover from the virus fallout and seasonal woes.

“Twelve months from now I think we’re going to be in new high territory,” Stovall said. “Once we do actually see the economy improve, once we do get justification of 2021 earnings projections for a 30%-plus advance in corporate profits, then I think the market will be able to work its way higher.”

In a year, Stovall predicts, the S&P 500 will be at 3,435 — a 1% gain from the all-time high hit in February.

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