Morning sunlight falls on the facade of the New York Stock Exchange (NYSE) building in Manhattan in New York City, New York, U.S., January 28, 2021. REUTERS/Mike Segar

NEW YORK (Reuters) -Stifel's chief market strategist Barry Bannister said on Monday that the S&P 500 is facing additional downside to the tune of a 5% decline to about 6,350 in the next several months, citing issues such as Fed policy and high valuations.

Pending shutdown-delayed economic data and signals from the Fed about its December meeting, Bannister sees the S&P 500 falling and also notes in his latest research note that in 2025 "we greatly underestimated the sentiment effects of AI capex and general investor exuberance."

As such, Bannister now expects the market to correct with the end of the central bank's "free lunch" of policy support, even as the market priced out recession risk as U.S. President Donald Trump's tariff policies proved to be less severe than initially announced in early April.

"Valuation pressure likely precedes slowing earnings revisions, and we describe continued economic risk in tandem with inflation stuck closer to 3% as the catalysts for a change in policy which contributes to slightly tighter U.S.," the strategist wrote.

And while Bannister sees the Fed responding "as the economy slows in 2026", he noted that "reactive policy is significantly less bullish than proactive" and that it will take until the June 2026 meeting for a largely new Fed Board to be in place.

(Reporting by Sinead Carew, Editing by William Maclean)