Measured cash deployment warranted; aggressive action requires more compelling risk/reward

Key takeaways

• The range of outcomes remains wide, with near‑term market moves driven by headlines.
• Equity risk/reward is incrementally improving, supported by a reset in valuations, sentiment, and technical conditions.
• Measured cash deployment is warranted, while a more aggressive stance would likely require a more compelling risk/reward tradeoff.

There are times when investors have an edge and times when that is less the case. Today’s market is being driven by day-to-day perceptions around progress, or the lack of it, toward ending the Iran war. As a result, markets are trading with limited conviction.

The range of outcomes remains wide

• A swift resolution to the Iran war would likely lead to a strong market rally, at least initially.
• Conversely, a prolonged conflict or escalation would likely pressure markets further, particularly if oil prices move sustainably higher, with West Texas Intermediate (WTI) crude oil above $100 or Brent above $115–$120, or if the 10-year U.S. Treasury yield rises above 4.5%.

As investors, we always operate in a fog of uncertainty. Using a weight of the evidence framework, we focus on identifying when the risk/reward backdrop is becoming more favorable and investors are being compensated for taking risk.

From that perspective, we are seeing incremental progress. Market valuations, sentiment, and prices have reset lower, which also lowers the bar for positive surprises.

This does not represent a high conviction call that the worst is behind us. A more decisive signal would likely require further downside and greater extremes across our indicators.

That said, the recent reset suggests that investors who are underweight equities should consider beginning to deploy cash in a measured way, with a sharper pullback likely presenting a more compelling opportunity to become aggressive.

As Peter Lynch famously noted, “Far more money has been lost by investors preparing for corrections than in the corrections themselves.”
Said another way, waiting for the “perfect” entry point often causes investors to miss opportunities that emerge during periods of uncertainty.

Below, we highlight several indicators and levels that help frame today’s risk/reward backdrop:

Key observations

1) Macro guardrails remain critical

WTI crude staying below $100 and the 10-year U.S. Treasury yield remaining below roughly 4.5% are important for avoiding a sharper market drawdown.

2) Corporate America has been battle tested

Over the past decade, profits ultimately rebounded following COVID, the fastest Fed tightening cycle since the 1980s, the highest inflation since the 1970s, supply shocks tied to the Russia Ukraine war, and last year’s tariff shock. While some of these periods saw deeper market declines, corporate resilience has remained an important longer-term support not to be underestimated.

3) The pullback remains modest by historical standards

The S&P 500’s peak to trough decline has been roughly 6.8% so far, compared with an average drawdown of about 10.1% since 2009, with wide variation.

4) Valuation and technicals point to key S&P 500 support zones

Near term support sits around 6,450–6,500 (currently ~6,495).

Longer term support is in the 6,000–6,200 range, levels that would likely present a more compelling risk/reward to lean more aggressively into weakness.

At the recent price low, the S&P 500’s forward P/E declined to 19.7x from 23.1x at the October peak, a roughly 15% reset. The entire decline has been driven by lower valuations, while forward earnings estimates continue to reach new highs.

For context, during last year’s tariff shock, the S&P 500 traded down to near an 18x forward P/E. A similar valuation in the 18x to 18.5x range would align with the 6,000–6,200 support zone.

Notably, the technology sector’s forward P/E recently fell to 21.1x, down from 32x in October and already back to levels seen after last year’s tariff shock.

At the same time, sentiment and positioning indicators are moving toward more pessimistic levels that have historically preceded durable rebounds, though conditions do not yet reflect a full capitulation.

Notably, the technology sector’s forward P/E recently fell to 21.1x, down from 32x in October and already back to levels seen after last year’s tariff shock.

At the same time, sentiment and positioning indicators are moving toward more pessimistic levels that have historically preceded durable rebounds, though conditions do not yet reflect a full capitulation.

For example:

• The AAII investor survey¹ shows bearish sentiment near 50%, approaching prior pessimistic extremes.
• At the recent low, only 19% of S&P 500 stocks were trading above their 50‑day moving average, consistent with oversold conditions. In more extreme episodes, such as last year’s tariff shock, this measure dropped closer to 5%, reflecting more indiscriminate selling.

Bottom line

The range of outcomes remains wide, and near-term market moves are being driven by headlines where investors have a limited edge. Still, we have seen an incremental reset in expectations, valuations, and technical conditions. This supports a measured approach to putting some capital to work today. A more aggressive stance would require a more compelling risk/reward tradeoff within our weight of the evidence framework.