After a steep sell-off on Wednesday pushed the S & P 500 to the brink of bear market territory, one strategist warns there could be more pain ahead. The plunge came after Target fell well short of Wall Street's earnings expectations as soaring inflation began to eat away at margins. The report sent the retail giant's stock almost 25% lower and came just a day after Walmart cited rising fuel and labor costs for its earnings miss. The Dow Jones Industrial Average and S & P both posted their worst drops since June 2020 on Wednesday. But this sell-off could just be the beginning, according to Gary Dugan, CEO and CIO of The Global CIO Office. Speaking to CNBC's "Capital Connection" on Thursday, Dugan highlighted that Wednesday was the first trading session in which dire economic warnings had shown up in corporate earnings. "Up until now, corporate earnings forecasts in the U.S. have been characterized as better than expected for the first quarter and everything was calm. But, as we saw, when someone comes with a surprise as Target did overnight, share prices fall 25%," Dugan, who has held CIO roles at both Barclays and Merrill Lynch in London, said. "That is really a warning to markets that we could see some significant downside as more and more S & P companies reflect on the challenges at hand." Federal Reserve Chairman Jerome Powell has said the c entral bank will not hesitate to continue hiking interest rates in order to rein in inflation, which came in at an annual 8.3% in April . However, the prospect of more aggressive monetary policy tightening has exacerbated recessionary fears. The Dow will begin Thursday's trade down more than 13% since the turn of the year and the S & P almost 18%, with futures pointing to further selling when trading opens on Wall Street. "I think we could comfortably go down another 15% from here and that would take us back down to a trend line that ended just before Covid," Dugan said. Central banks and governments adopted exceptionally loose monetary and fiscal policies in order to shepherd the economy through the Covid-19 pandemic, which in turns drove stock market valuations from their March 2020 lows to record highs in late 2021. However, Dugan argued that this was "not consistent with history." "We have got to get back to normal, we have got to get back to more regular valuations that we comprehend and companies that aren't supported by extremely low interest rates and very loose government policy," he said. "So when you take that as a package, as I said, 15% in my view takes us back to fair value." Opportunities in Asia As developed markets likely follow the U.S. further into negative territory, Dugan advised investors to seek stock market opportunities in emerging markets, particularly in Asia. "I'm personally invested, for example, in Vietnam – fantastic long term story, the right demographics, and a valuation in many of these parts of the world, including here in the Middle East, that were not as extreme," he said. Emerging markets haver broadly lagged Wall Street's ascent during the 18 months following the March 2020 plunge, meaning valuations may viewed as less inflated and therefore less vulnerable to current economic strains. "Certainly you could see some downside if they follow Wall Street, but the fundamentals are still very helpful," Dugan added.
Traders work on the floor of the New York Stock Exchange (NYSE) on May 18, 2022 in New York City.
Spencer Platt | Getty Images
After a steep sell-off on Wednesday pushed the S&P 500 to the brink of bear market territory, one strategist warns there could be more pain ahead.