Handicapping the next move for a stressed bull market
The market’s message and intentions are always worth debating — especially so during an intense pullback, with cacophonous policy headlines and piqued investor emotions animating the action day to day. Here’s an assessment of the weight of the evidence, after another rough week — but one that ended in a perky, if apprehensive, rally off a six-month low Friday afternoon, leaving the S & P 500 more than 6% from its record high reached less than three weeks ago — in the form of a bull-bear debate. The bear case: This tape is guilty until proven innocent. The Nasdaq ended one of its longer streaks above its 200-day average in recent memory, and history says to expect more near-term downside for a while at least. The S & P 500 just broke its December low during the first quarter, a classic warning sign from the Stock Trader’s Almanac, which suggests a high chance of significant further weakness before an ultimate low (and likely strong finish to the year) is reached. In fact, the index briefly even cracked its low from the entire fourth quarter, a rare gut check. Yes, the S & P 500 chopped around the 5700 for most of the week and held it with the late-Friday levitation. But does the market typically give traders four straight days to buy a durable low? The market could easily continue this tentative bounce here for any reason (or none at all), but the upside is capped well below the record highs. A slight majority of 5%+ pullbacks end before getting to a full 10% correction. Since 2022, though, it’s been more like a coin toss, according to 3Fourteen Research, which notes here that the best dip-buying backdrop was 2009-2021, when economic-growth scares meant falling bond yields and a lack of inflation meant the Federal Reserve’s safety net was never far below the market. Whatever the ultimate makeup of trade and immigration policies, they are at least initially more a source of economic friction than fuel, and a drag on growth. The Treasury market, with two-year yields down from 4.35% to 4% in a few weeks, is on high alert for a slowdown, just as Trump administration officials express an apparent acceptance of a potential “detox” economic slump front-loaded into the first year of its term. Granted, the retail-investor surveys are reflecting a panicky response to chaotic policy headlines, making it hazardous to get incrementally bearish from here. But we haven’t seen the kind of headlong fund outflows or aggressive short-selling activity that would suggest the bears are overplaying their hand and that the low is in. Wall Street strategists haven’t yet cut year-end index targets and while sell-side economists are trimming GDP estimates, recession calls haven’t begun. Sure, the tech giants have come well off the boil and the Nasdaq 100 held tough at the 20,000 level and there’s a scenario in which mega-cap tech starts to act as defensive leadership again at some point. But the Nasdaq 100’s valuation has barely retreated as is far above pre-pandemic norms. And for investors who have an itch to play a cyclical acceleration, the rest of the world can now scratch it. Germany’s move to lift government borrowing restraints and invest heavily in infrastructure and defense was an historic release of previously untapped fiscal power and growth sentiment. The German 10-year government bond yield rocketed from 2.66% to 3.09 on the week, the Euro soaring from $1.05 to above $1.08, the German DAX up 15% year to date. This as China also stimulates and its stock market roars back. If this is all about a rebalancing of consumption patterns and fiscal relationships across the globe after many years of overreliance on U.S. consumption, it’s a positive. But big, rapid moves in currencies and global bond yields can be destabilizing and raise risk premiums. The early August 2024 “yen carry trade” panic is a recent example, which came after a two-week U.S. equity market setback that looks quite a bit like the current one. The bull case: The market has had a proper reset The S & P fell more than 7% from high to low over 12 trading days, taking it back to the mid-July high —almost to the tick — before bouncing a full 1.8% from the midday Friday low into the weekend. .SPX 1Y mountain S & P 500, 1-year Yes, the index pierced below its 200-day moving average, but that trend line continues to slope solidly higher. The tape became oversold enough into the end of the week to make a pretty good bounce plausible, relieving some immediate pressure, and all things considered it’s remained rather orderly. Investor attitudes have grown starkly worried, according to surveys of retail and professional investors. The Fear & Greed Index , a composite of several market-based indicators rather than opinions, by Thursday was pressing toward anxious extremes, a pretty good contrarian setup. A decent case can be made that the noisy sell-off into the middle of last week represented a moment of peak tariff aggression just as the slow-moving economic growth scare of recent weeks burst into the open for all to observe and fret over. The S & P 500 has spent the past four days testing the 5700 level repeatedly, and — so far — has absorbed the pressure, the bulls showing some fight even into another potentially noisy news weekend. Those charts that show blowout readings of the Economic Policy Uncertainty Index and tally up mentions of “tariffs” on corporate conference calls have been ubiquitous in recent weeks. One can’t argue against the sense of mass indecision given the lack of policy-message clarity. Yet historically, such high levels of perceived uncertainty coincide with better buying than selling opportunities for stocks. Let’s not forget, too, that along with the fitful on-off tariff news and a stutter-step in consumer spending, the recent market seizure was triggered by a nasty turnabout in once-crowded momentum stocks across every sector. While the market surely traded twitch-by-twitch with headlines about the less-than-coherent plan for tariffs last week, the stocks that exerted the most downside pressure on the S & P 500, were former momentum leaders Nvidia , Amazon , Meta , Tesla and JPMorgan . The momentum cohort has now had a true correction and JP Morgan quantitative strategists argued Friday that funds’ exposures to this group have come back from historic extremes toward the more normal range. This style is not necessarily washed out yet but should present less risk of erratic liquidation looking ahead. Admittedly, the year started with the consensus brimming with high expectations, with valuations at post-pandemic highs and retail investors on a raging risk bender. But the market has largely taken care of this, puncturing all of the most popular premises entering 2025: U.S. exceptionalism, bearishness on bonds and a belief that the market could broaden in a smooth and painless way. Stocks have traded terribly off a pretty good earnings season, in part because corporate guidance has been uninspiring and current-quarter consensus S & P 500 profit growth has dropped from 11.6% to 7.3%, according to FactSet. Yet assuming the forecast settles near 7% and penciling in a typical margin or estimate-beating by companies, that’s supportive growth. Consumer incomes in aggregate continue to grow, February job growth was passable and a slow start to retail sales this winter means a bigger spending cushion in coming months. Sure, the drop in Treasury yields speaks to slowdown fears, but they also support rate-sensitive parts of the economy such as housing. Who knows if a good trading bottom is in. And any bounce will initially be suspect given all the congestion looming above on the charts. But when prices sink and valuations fall, stocks become less risky for a long-term owner, not more. The median S & P 500 stock is 15% from its high. The equal-weighted S & P 500 is back to its 10-year average forward P/E ratio. Quality stocks have slackened even as speculative ones have buckled. Alphabet is now trading at its largest-ever discount to the broader market. A choppy start to a post-election year was to be expected, pullbacks are perfectly normal, and it remains a bull market until proven otherwise. Doesn’t it?
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