Fuel to the rally – Expect a choppy path higher

A note from the CIO

Markets are responding positively today to easing geopolitical tensions and falling oil prices, reinforcing our view that the ongoing bull market deserves the benefit of the doubt.

What’s driving today’s rally

• Markets are higher following Tuesday night’s announcement of a two-week U.S.–Iran ceasefire, along with plans to reopen the Strait of Hormuz.
• Oil remains the key macro-variable driving market action. Crude oil prices are down roughly 15%, adding meaningful fuel to the rally.
• Coincidentally, today marks the one-year anniversary of the S&P 500’s closing low following last year’s tariff shock.

Bull market still deserves the benefit of the doubt

• The market remains highly headline-driven, which helps explain the sharp reaction to recent news. Today is a good reminder that returns are often driven by capturing just a handful of important days.
• After discussing the risk of further downside in early March, we discussed in recent market notes that underweight investors should begin adding to equities, even if some downside potential remained given an improved risk/reward backdrop.
• Our indicators showed a healthy reset across valuations, prices, and sentiment, marking the most oversold conditions since last year’s tariff shock and a roughly 15% contraction in the S&P 500’s forward price-to-earnings ratio.
• The S&P 500’s recent peak-to-trough pullback of roughly 9% was close to the average decline of 10% since 2009, though still below the typical 14% intra-year pullback^{Disclosure 1} (17% during mid-term election years^{Disclosure 2} ).
• Historically, once these pullbacks have ended, the average subsequent gain has been about 19% (since March 2009).

What we’re watching

• Ideally, today’s gains hold into the close with strong market breadth, which would help confirm improving momentum. A fade would be a negative short-term signal.
• While we continue to see upside, the path higher is likely to remain choppy, given this is a ceasefire rather than a full agreement.
• Just as we’ve aimed not to overreact during sharp market downdrafts, we intend to do the same on strong up days.
• Consistent with our Seventh Inning Stretch outlook, our work suggests there are still innings left in this bull market — but also likely more curveballs ahead. 

Positioning implications

• Broad-based selling increases the odds of a broad-based rally.
• Small caps and emerging markets likely to see greater upside in this relief rally.
• We continue to highlight technology, where valuations are at their lowest since early 2023.
• Industrials should benefit from reduced recession risk.
• A positive for our recent House View shift that upgraded bond duration to more attractive as intermediate rates hovered near one‑year highs, and boosting high yield to neutral.

In a headline‑driven market, we’ll continue to follow the weight of the evidence, stay open‑minded, and keep you informed as conditions evolve, and new curveballs emerge.