A stock market correction is coming as rates, inflation, and valuations darken the outlook for investors, strategist says

• The S&P 500 will suffer a 5% drop, according to CFRA's Sam Stovall.
• The veteran strategist warned of a veteran backdrop for stocks.
• The market could see its first "crack in the ice" in the technology sector, he warned.

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The stock market is facing a correction as a trio of unfavorable factors will weigh on stock prices, according to Sam Stovall, chief investment strategist at CFRA Research.

The Wall Street veteran highlighted the strong performance of stocks so far this year, with the S&P 500 up 15% in 2024. However, the benchmark index is about to fall 5%predicted, thanks to the bearish setting of interest rates, inflation and stock valuations.

Inflation is declining, but is still above the Federal Reserve's 2% target, leading central bankers to project only one rate cut by the end of the year.

Higher rates have triggered the longest Treasury reversal in history 2-10 performance curve, the bond market's famous indicator of a coming recession. The indicator, which flashes when the 2-year yield exceeds the 10-year yield, has been a reliable recession signal throughout history, and economists have said this time will likely be no different.

Stock valuations are also high by historical standards, hinting at future declines. The S&P 500 is priced at a 32% premium compared to its average price-to-earnings ratio over the past 20 years, Stovall noted. Technology stocks, which have dominated the market in recent years, are trading at a 68% premium.

"I think we're really stretched and we have to see some upward revisions to earnings estimates, I think, to justify that," Stovall said in a recent interview with CNBC.

Stocks could see their first "crack in the ice" in the technology sector, he added, pointing to lofty valuations among mega-cap tech stocks.

"It's just been technology that's been outperforming the market. I kind of feel like this is a jumbo jet that flies on a single engine, and you wonder how long it's going to stay in the air," he warned.

Other forecasters have warned of limited market upside as stocks, particularly technology stocks, continue to rise. By one valuation metric, the stock market appears to be the most overvalued since 1929, which could pave the way for a pronounced correctionwarned elite investor John Hussman.