By Jacob Sonenshine

Truist's investment strategist, who downgraded stocks in February, has downgraded equities yet again.

Keith Lerner, co-chief investment strategist, now rates the equity market "less attractive," down from "neutral."

He upgraded cash, which yields more than 4% annually, is above the recent rate of inflation, and would provide stronger returns if stocks tumble again.

In February, Lerner downgraded the market to "neutral" from "attractive." At the time, the S&P 500 had just begun to drop from its record close of 6144 on Feb. 19, close to its most expensive level of the past few years.

Lerner argued it was likely to drop further. U.S. economic data had begun to disappoint. Generally high interest rates had taken their toll on consumer spending, and President Donald Trump was about to announce tariffs.

He was right -- the S&P 500 dropped further, and now trades at just under 5300, about 14% below its high. Still, Lerner advises clients to steer clear of buying more stock because the index has bounced from its 4835 intraday low point of the decline.

"We are using the snapback to downgrade equities and raise cash one notch," Lerner wrote.

The snapback makes the market look still too expensive, Lerner says. The S&P 500 trades at 19.2 analyst's aggregate earnings estimates. That is still a hair above prepandemic levels, but it shouldn't be. Today, rates are higher, making fixed-income a bit more attractive to own, while the risk of recession has risen.

That would pressure earnings, which makes the index appear even more expensive than it looks at a glance.

Earnings estimates for the benchmark index, down to $265 for 2025 from $270 just before Trump announced tariffs, should drop more. Lerner mentions a slowing economy has barely begun to dent the bottom line projections of analysts.

If economic growth slows to the current consensus of just over 1% for 2025, companies' expected sales would fall by low single digits. That would pressure profit margins, and earnings estimates could therefore fall by double digits.

That is why the S&P 500 could revisit its low, which is almost 10% below its current level. Many technicians acknowledge that 4800 is roughly where buyers came in quickly to prop the index up. That is where one can expect the index to truly stabilize, but it's a long way down from here.

Falling to 4800 would require a couple catalysts. Trump's tariffs only took effect in the past several weeks, and waning consumer and business sentiment is a signal that reduced economic activity may be just around the corner.

Adding to the uncertainty is the Federal Reserve's next move. In the near-term, tariffs could drive higher inflation, which means the Fed can't cut rates soon to stabilize the economy. It could cut later, when and if a weakening economy brings inflation downward, but the economy isn't quite there yet, so the market isn't ready to assume that rate cuts are a shoo-in.

So it is difficult for the market to know to how much the economy will suffer, and the range of potential outcomes for stock prices is wide. That is another way of saying volatility will remain high.

The Cboe Volatility Index has remained at around 30 for the past few weeks. In stable times, it tends to hum in the low to mid teens. Right now, it is signaling that stocks will whipsaw back and forth for some time. Whatever level the S&P 500 falls to, the days in which it does drop will probably be fairly extreme.

So just be patient. Don't buy too much stock right now.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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April 18, 2025 14:30 ET (18:30 GMT)

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