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Risk of 5% to 10% stock market dip high: Deutsche Bank

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Risk of 5% to 10% stock market dip high: Deutsche Bank

With a U.S. profit recession expected in the first half of 2015 and investors unlikely to pay up for stocks, the risk of a stock market drop of 5% to 10% is rising, Deutsche  Bank says. That’s the warning Deutsche Bank market strategist David Bianco zapped out to clients today before the opening bell on Wall Street.AP FINANCIAL MARKETS WALL STREET F FILE USA NY

Bianco expects earnings for the broad Standard & Poor’s 500-stock index to contract in the first half of 2015 — the first time that’s happened since 2009 during the financial crisis. And the combination of soft earnings and his belief that investors won’t pay top dollar for stocks in a market that is already trading at above-average valuations is a recipe for a short-term pullback on Wall Street.

Profits are projected to fall year-over-year in both the first and second quarter of 2015, according to analyst earnings estimates compiled by Thomson Reuters I/B/E/S. Profits are expected to contract 2.9% in the first three months of the year and nearly 1% in the second quarter, which is far below the 5% to 6% estimated profit growth for the first two quarters of the year projected back on Jan. 1. Analysts have  been slashing profit estimates since the year began.

And with the S&P 500 kicking off today’s trading action selling around 2100 and close to 18 times projected 2015 earnings, according to Thomson Reuters, now is not the time to “rely on further P-E expansion,” Bianco warns. In early trading today, the S&P 500 was up 5 points, or 0.2%, to 2107.

Still, despite his belief that a so-called “profit recession” will occur in the first half of the year and that first quarter results will mark the worst quarter for profits since the Great Recession,  Bianco still believes that 60% or more of the S&P 500 companies will top the lower earnings bar in the first quarter. Thirty-two S&P 500 companies report earnings this week, including big banks like JPMorgan Chase and Wells Fargo on Tuesday. Chipmaker Intel and health care giant Johnson & Johnson also report first-quarter results on Tuesday.