Market reset creates opportunity, particularly in tech, amid seasonal choppiness

• An initial Fed hike does not typically mark the end of a bull market, though near-term returns tend to be weaker, and we are still in a choppier seasonal period as we move closer to the midterm elections.
• Importantly, however, the market has already undergone a meaningful reset. The S&P 500 has been essentially flat since June 2, even as earnings estimates have continued to rise, bringing its forward valuation down to approximately 19x, near the oil-shock lows.
• Our work suggests technology (tech) and growth areas present a relative opportunity today. The tech sector’s forward price-to-earnings (P/E) has declined from 32x last October to 21x, near where it stood when ChatGPT launched, despite robust earnings.
• Stress-testing further downside. Even if the broader market sees further weakness, our stress test points to an area roughly 5% to 8% below current levels, where the tariff-shock valuation low, historical pullback levels, and key technical support converge. Still, the evidence in our work suggests the upside potential in this ongoing bull market is greater than the downside.
• Stay aligned with the primary uptrend. The weight of the evidence supports staying aligned with the primary market uptrend. Underweight investors should consider adding exposure, with growth areas such as tech presenting a relative opportunity today. We would view a deeper pullback as an opportunity to potentially become more aggressive.

The Fed raised rates for the first time since 2023, adding another source of uncertainty amid many crosscurrents. As discussed in our team’s broader Federal Reserve (Fed) meeting commentary, the future path of monetary policy will depend on how inflation and economic growth evolve. Here, our focus is on what the recent market reset means for equity investors.

History suggests the near-term path may remain uneven. Since the start of the modern Fed era in 1994, the S&P 500 declined during the one- and three-month periods following the first hike in five of six completed cycles. However, performance improved as the time horizon expanded. Stocks were higher 12 months later in five of the six cycles, with an average gain of 9%.

Volatility has also historically picked up during this stage of midterm-election years, even without a shift in Fed policy.

Importantly, however, an initial Fed hike does not typically mark the end of a bull market. Outside of 2022, bull markets continued for another nine to 74 months after the first increase. The 2022 cycle was the clear negative outlier, with the Fed raising rates by 5.25% in one of the most aggressive tightening campaigns of the modern era. That is not our current base-case expectation.

The more constructive development is what has occurred beneath the market’s relatively flat headline performance.

Since June 2, the S&P 500 has been essentially flat, even as consensus earnings estimates have continued to rise. As a result, the index’s forward P/E has declined to approximately 19x, near the valuation low reached during the oil shock.

This distinction matters. A sideways market with rising earnings is fundamentally different from a market whose valuation is falling because earnings expectations are deteriorating. In this case, time and earnings growth have allowed valuations to compress without requiring a major decline in the index.

The result is a healthier market setup and an improved risk-reward, even as near-term choppiness is likely to continue.

The valuation reset has been even more meaningful in tech, which our work suggests presents a relative opportunity today.

The sector’s forward P/E has declined from 32x last October to approximately 21x, roughly where it stood when ChatGPT launched in November 2022. At the same time, forward earnings growth remains by far the strongest in the market, with estimates rising approximately 20% over just the past three months.

There are still risks and open questions around circular financing and the pace of new model development. Yet, with tech’s relative valuation premium down to approximately 9%, near the lowest level of the past decade, the sector appears to be reflecting at least some of that uncertainty.

The latest American Association of Individual Investors (AAII) survey shows bearish sentiment at its highest level since May 2025, around the tariff shock, and nearing readings more commonly associated with market lows.

At the same time, market breadth, while not quite washed out, is approaching those levels as weakness has broadened beneath the surface. The percentage of stocks above their 50-day moving average has declined to 30%; readings in the 20s are often considered oversold.

While we have not seen a deep market flush, the bar for positive surprises has reset lower.

The seasonal backdrop remains challenging, and macroeconomic uncertainty is elevated, while higher interest rates and oil prices could present a headwind for the economy and market valuations.

Still, it is useful to put the potential downside into perspective. Based on current market and earnings levels, our stress test points to an area roughly 5% to 8% below current levels.

Even if the S&P 500 were to return to the valuation reached during the 2025 tariff shock, the index would trade near 18x forward earnings, implying a level around 7,200. That area is reinforced by other support measures, including the 200-day moving average and the median historical pullback of roughly 7%. Deeper support near 7,000 aligns with the early-2026 highs and the average pullback since 2009.

However, the broader market does not necessarily need to reach that support zone for opportunities to be present. Our work suggests tech’s significant valuation reset is already creating a more attractive setup today.

Ultimately, the evidence in our work suggests the upside potential in this ongoing bull market is greater than the downside.

The weight of the evidence supports staying aligned with the primary market uptrend. Underweight investors should consider adding equity exposure, with tech presenting a relative opportunity today. A deeper pullback would potentially provide an opportunity to become more aggressive.

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