A stock-market indicator has entered a phase historically associated with the worst return prospects for the S&P 500 Index after trade fears gripped financial markets and dimmed Corporate America’s outlook for profit growth.

The Equity Market Regime Model, a Bloomberg Intelligence model that tracks the benchmark stock gauge and clusters periods into three phases — accelerated growth (green), moderate growth (yellow) and decline (red) — fell into the cautious red zone in March and April, according to data compiled by BI’s Gina Martin Adams and Gillian Wolff.

The seven prior instances have been associated with a 5.6% average drop in the S&P 500 in the next 12 months. The current red regime is the model’s first bearish signal since February 2022, when anxiety about the Federal Reserve’s interest-rate path sent US stocks into a bear market.

It’s hard to ascertain exactly what this means for the S&P 500. The red regime, which follows 21 months in the neutral “yellow” zone, is still in the early innings for most of the model’s components. While this may mean there are more losses ahead, unpredictable US trade policy has left investors debating whether the worst part of the selloff is over.

“Either the global trade war comes to an end soon and all of this resolves itself, or the selling in stocks needs to get worse, with people throwing in the towel before things get so bad that it turns into a buying opportunity,” Wolff, an equity strategist, said by phone. “But we’re not there yet.”

Source: Bloomberg Intelligence

The model is based on six factors, including the correlation between index member returns, the S&P 500’s position compared to its 200-day moving average and the benchmark’s annual change in price-to-book.

The biggest warning sign that pushed the indicator into red territory was when the S&P 500 closed below its 200-DMA in March, the first time since November 2023. The index currently sits roughly 1% below its long-term support line after sliding as much as 13% below it. That said, its year-over-year price-to-book ratio has also slumped to levels consistent with past red regimes.

Other model components are only showing early signs of deterioration.

For instance, the year-over-year change in forward earnings estimates is well above its five-year average, but is falling toward red regime norms. M2 money supply growth — a measure of excess cash in the market, and an indicator of rising inflation — is picking up, but remains below levels hit when the Fed has intervened, suggesting policymakers aren’t too concerned about slowing economic growth.

On Wednesday, Fed Chair Jerome Powell made clear he won’t be rushed into lowering borrowing costs until there’s more certainty on the direction of trade policy from the White House. Powell — acknowledging that consumer and business sentiment had darkened — said the hard data still paint a picture of a healthy economy.

Source: Bloomberg Intelligence

Red regimes usually coincide with stretches of negative annualized returns and typically last about 16 months, according to data compiled by BI for trading going back to 1996. A red regime records a 5.6% average annualized loss in the S&P 500, compared to a 29% average gain in a green period. The most recent one started in June 2020, as US stocks rebounded following a pandemic-induced selloff.

For BI’s model to become more bullish, the White House would likely need to deescalate on protectionism, thereby easing stagflation fears and possibly improving Corporate America’s profit outlook, according to Seth Merrill, chief investment officer at Crewe Advisors.

“There’s a growing belief that the Trump administration will back off its aggressive tariff policy once further weakness begins to show up in jobs growth,” Merrill said by phone. “But here’s the risk: By the time that happens it may be too little, too late since earnings growth is already slowing, which may trigger more selling if the economic outlook deteriorates further from here.”