A little good news goes a long way – Now what?

Key Takeaways

After the recent selloff, our key message was investors should start thinking more about two-way risks—not just the downside. Moreover, with such depressed investor expectations, our work suggested a little good news could go a long way.

After the sharp bounce, we still see potential for some more upside given how stretched markets had become to the downside. That said, we expect the road ahead to be bumpy and do not anticipate a quick trip back to new highs.

Big picture

With fear running high and markets the most stretched to the downside in years, the announcement by President Trump that he would delay implementation of the April 2^nd reciprocal tariffs for 90 days sent the market skyrocketing.

The S&P 500 jumped 9.5%, marking the third largest percentage increase since 1950, and the biggest one-day move since November 2008.

For context, prior to this rebound, the S&P 500 had seen a peak-to-trough decline of 18.9% since just in late February. The market was effectively pricing in a 65% to 80% chance of a recession based on the median and average market drawdowns around such events of 24% and 29%, respectively.

Moreover, the market was seeing indiscriminate selling, which tends to occur in the later part of a leg down. The percentage of stocks in the S&P 500 that are in intermediate uptrends (defined by their 50-day moving average) was just 5%, the lowest since stocks bottomed in October 2022.

Further, the P/E for the Magnificent 7 stocks dropped to 22, down from 34 last July, near the level seen when ChatGPT was released in November 2022.

Importantly, as highlighted in our prior note, volatility tends to cluster. The biggest down days tend to be followed by the biggest up days and this pattern once again is playing out.

Historically after the top 10 largest one-day increases, market returns have been mixed shorter-term but improved over the next year.

Moreover, the tariff issues have been delayed but uncertainty reigns. Even if the average tariff rate comes down further to 10% for everyone (including China), that's still 4x what it was previously.

We are only likely at the beginning of the corporate earning cuts, which the market had started to discount. We continue to expect a cooling of the economy while the Federal Reserve’s reaction function to weaker economic data will likely remain constrained given ongoing inflation concerns.

From a technical perspective, with the S&P 500 closing at 5457, we see a wide band of overhead resistance between 5500 to 5800.

Positioning

Considerations:

1. For those investors with excess cash, we would use a dollar-cost averaging approach to help smooth out the bumpy market path that we expect to continue;
2. For those investors that are above-benchmark equity allocations, we would dial down risk toward benchmark neutral on the market bounces;
3. We would place a greater focus on the U.S. and large cap equities.