Is the Stock Market About to Fall Sharply? Prediction Markets Flash a Warning, but Wall Street Sees Buying Opportunities.

Recession fears have resurfaced as the Iran war has pushed oil prices to a multiyear high. In turn, investors have rotated away from stocks in favor of safer assets such as U.S. Treasuries.

The S&P 500 (SNPINDEX: ^GSPC) is currently 6% below its high, and predication markets traders expect the index to fall even further in the coming months. Yet Wall Street sees buying opportunities across the technology sector, particularly in two artificial intelligence stocks.

Here are the important details.

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Prediction markets show a high probability that the S&P 500 will drop sharply in the coming months

In January, Kalshi prediction markets showed a 27% chance that the S&P 500 would drop below 5,900 in 2026. But the probability has since increased to 60% as the Iran conflict has pushed oil prices above $100 per barrel for the first time since the summer of 2022. If the S&P 500 does indeed fall below 5,900, that implies at least 10% downside from its current level of 6,583.

Kalshi traders are sending investors another important signal. In January, contracts showed a 19% chance that the S&P 500 would end the year between 7,200 and 7,600, which made it the most likely outcome at the time. The probability of that event has actually risen by a percentage point, and it remains to most likely outcome today.

What does that mean? Kalshi traders anticipate strong buying activity as the stock market declines. The odds of a severe intra-year drawdown have increased -- if the S&P 500 drops below 5,900, the implied decline is at least 15% from the January high of 6,979 -- but traders' views on where the index will finish the year have not changed.

Wall Street has a similar take on the situation. Some analysts have warned that elevated oil prices could drag stocks into a market correction or bear market in the near term, but the consensus estimate still says the S&P 500 will reach 8,330 in the next year, according to FactSet Research. That implies 26% upside from its current level of 6,583.

Wall Street analysts have raised forward earnings estimates across the technology sector

Investors generally value stocks based on earnings multiples (e.g. price-to-earnings), so prices (eventually) move in the same direction as forward earnings estimates. In other words, stocks prices tend to increase when earnings estimates rise, and stocks prices tend to decline when earnings estimates fall.

In December, Wall Street's consensus estimate said technology companies in aggregate would report earnings growth of 34% in the first quarter, but the consensus figure has since increased to 45%, according to FactSet. No stock market sector has seen a sharper upward revision to forward earnings estimates.

Yet, the technology sector has been the third-worst performing market sector year to date. I think that discrepancy -- strong upward revisions to earnings estimates combined with dismal returns in recent months -- creates a buying opportunity for investors.

Wall Street is particularly bullish on Micron and Nvidia, though analysts also expect big gains in Palantir

Upward revisions to earnings estimates have been particularly pronounced in four artificial intelligence (AI) stocks: Sandisk (NASDAQ: SNDK), Micron Technology (NASDAQ: MU), Nvidia (NASDAQ: NVDA), and Palantir Technologies (NASDAQ: PLTR).

The first three are semiconductor companies benefiting from demand for AI infrastructure, while Palantir is a recognized leader in AI decisioning software. Across all four stocks, Wall Street analysts generally view Micron and Nvidia as the best buys right now.

Micron's median target price of $550 per share implies 50% upside from its current share price of $366. And Nvidia's median target price of $265 per share also implies 50% upside from its current share price of $177, according to The Wall Street Journal.

What about the other two? Sandisk's median target price of $745 per share implies just 6% upside from its current share price of $701. And Palantir's median target price of $200 per share implies 35% upside from its current share price of $148.

Trevor Jennewine has positions in Nvidia and Palantir Technologies. The Motley Fool has positions in and recommends FactSet Research Systems, Micron Technology, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.