Three concerns collide – Where the bull market may find its footing

• The bull market remains intact, but the bumpier second-half path we’ve anticipated is unfolding as AI/tech uncertainty, geopolitical tensions, and higher interest rates converge.
• The current pullback appears more consistent with a reset than a change in the broader bull market trend.
• Based on a combination of history, valuations, and technicals, our work suggests downside for both the S&P 500 and the technology (tech) sector is likely limited to roughly 5% to 8% from current levels.
• For investors with below-target equity exposure, we would add on current weakness and become more aggressive if markets move toward those support levels.

Equity markets, notably growth areas, have experienced weakness of late as investors grapple with a trio of concerns.

First, uncertainty surrounding AI and tech has returned to the forefront. Investors have become increasingly focused on AI-related capital spending and higher borrowing following a historic rally.

Second, geopolitical concerns have reemerged. Tensions in the Middle East have intensified, contributing to higher oil prices and renewed inflation concerns.

Third, interest rates continued to move higher. Although the Federal Reserve (Fed) left policy rates unchanged, financial conditions tightened as the 10-year Treasury yield rose to 4.7%, near the upper end of its recent range, while the 30-year Treasury yield climbed above 5.2%, its highest level since 2007.

Using our evidence-based framework, the current pullback appears more consistent with a reset in the bull market than a change in the underlying trend.

The S&P 500 rallied approximately 20% from the March low through the early June peak.

• That gain was nearly identical to the average 19% rebound following pullbacks since 2009. In other words, following such a strong advance, a period of consolidation is to be expected.

Tech’s advance was even more extreme. The sector rallied roughly 47% in just two months before peaking.

• Since the current bull market began, tech has experienced four corrections averaging roughly 18% over three months, compared to the current pullback of approximately 14% over two months.
• History suggests the current tech correction may not be complete, but it is becoming increasingly mature.
• It is also worth remembering that since the March 2009 price low, the S&P 500 has experienced more than 30 pullbacks of greater than 5%. Despite those setbacks, the market gained over 1,300% on a total return basis through its recent peak.
• Pullbacks are often the admission price investors pay for the potential of higher long-term equity returns.

Our team continues to expect economic growth slightly above 2% and has seen little evidence to date to alter that view.

Higher interest rates are tightening financial conditions and bear close monitoring. However, the economy remains resilient overall, and our base case does not currently point to a meaningful deterioration in growth.

The recent pullback has been driven by lower valuations rather than deteriorating earnings expectations. Importantly, forward earnings estimates continue to rise and are at record highs.

Notably, if markets were to decline another 5% to 8%, valuations would likely revisit levels that provided support during the oil shock earlier this year.

For the S&P 500, that would imply a forward P/E near 19x (currently 19.3x), while the tech sector would likely approach 20x (currently 20.8x).

Tech and semiconductors continue to bear the brunt of the correction following their historic advance.

That said, both the S&P 500 and tech sector remain within broader long-term uptrends. The recent weakness appears more consistent with a reset in a market that became overheated than a breakdown in the primary trend.

Technical indicators, such as support levels, retracement analysis, and the 200-day moving average align well with the previously discussed fundamental support levels, also suggesting a broad band of support roughly 5% to 8% below current levels.

The market is confronting a difficult combination of AI and tech uncertainty, geopolitical tensions, and higher interest rates. These are among the key risks that led us to anticipate a bumpier second half.

While the corrective process may not be complete, the weight of the evidence favors a reset within an ongoing bull market.  Our work suggests downside for both the S&P 500 and tech is likely limited to roughly 5% to 8% from current levels.

For investors with below-target equity exposure, we would use current weakness as an opportunity to add exposure and become more aggressive should markets move toward those support levels.

As always, we will continue to follow the weight of the evidence, keep an open mind, and update you as our views evolve