Pullback likely has further to go but primary trend still positive

Market Perspective

April 15, 2024

What happened

After a serene first quarter backdrop, several crosscurrents have led to a more volatile trading environment across the capital markets.

  • Political tensions in the Middle East are heating up.
  • A hot consumer inflation report and ongoing economic resilience has led the market to push back the potential for a Federal Reserve (Fed) rate cut to the fall from the prior expectations of the summer.
  • This repricing of Fed rate cuts along with still strong economic data, including the blowout employment report, the return of manufacturing surveys to expansion, and this morning’s strong retail sales report, has led the 10-year U.S. Treasury yield to jump above 4.6%, a five-month high.
  • At the same time, the first quarter earnings season is just getting underway and should provide further clarity on the economic environment and corporate profit margins.

Our take

Our view remains that the primary stock market trend remains positive. Yet, we continue to expect a bumpier path forward relative to the abnormally-smooth first quarter ride.

Indeed, strong price momentum, such as five-straight months up for the S&P 500 or 10%+ first quarters—seen prior to this recent bout of volatility—tends to be a characteristic of a bull market.

  • Historically, after 10%+ first quarter returns, the S&P 500 was higher by the end of the year 10 out of 11 times. Yet, it’s crucial to recognize that the additional gains did not come without hiccups along the way.
  • The average maximum pullback for the S&P 500 over the rest of the year following strong first quarters averaged 11% (7% median). The minimum intra-year pullback was 4%.
  • Moreover, since 1980, there have been only three years – 1993, 1995, and 2017 – that did not see at least one 5% intra-year pullback. And we have tended to average about three pullbacks a year.

Indeed, periodic pullbacks are the admission price to the market. And they always come with bad news.

Some of the biggest known risks that we outlined early in the month have come swiftly into view – that is the potential of stickier inflation and a higher and more volatile interest rate environment. And we have also seen the unknown events, which always occur, impacting the market—in this case, rising geopolitical tensions.

Yet, the reasons we stay positive over the intermediate term, notwithstanding the potential of a deeper pullback in the near term, are as follows:

1) The economy remains resilient. Our motto for several months now—and the lesson from market history—is a stronger economy with fewer rate cuts is preferable to a weakening economy in need of significant rate cuts. Now, if we get no rate cuts this year, that could present a larger challenge, but that is not our base case.

2) Strong earnings – S&P 500 forward earnings estimates, supported by a resilient economy, are rising, and at a record high.

3) Stocks provide a partial hedge to inflation – If inflation remains stickier, this will likely limit any further expansion in market valuations. However, historically, earnings and inflation have a high correlation. That is, higher inflation is associated with a higher level of sales and subsequently rising earnings trends.

4) Oil prices not an issue yet. Geopolitical tensions are heating up. From an economic perspective, the risks tend to manifest in oil prices.

Historically, a sharp year-over-year rise in oil above 80% has preceded many recessions. While oil prices have risen from their lows, on a year-over-year basis they are relatively flat. Moreover, the U.S. is now a major producer of energy so there is an offset in the form of a flow through to corporate profits, which serves to offset some of the higher prices at the pump for the consumer.  

5) Technicals as mentioned previously, strong price momentum tends to be a characteristic of a bull market. Although sentiment has shown some signs of complacency, the market is in a longer-term uptrend, and, until recently, we saw market strength broaden out with the percentage of stocks making 52-week highs at the best level in several years. We see a strong band of support in the 4800 to 5000 range (from the current level of 5115).


The expected choppier near-term environment, as well as the inflation and interest rate challenges, reinforces our focus on the U.S. and large caps, given stronger balance sheets and earnings trends.

We remain underweight more interest rate sensitive areas, such as the real estate sector, which just made a fresh 20-year price low relative to the S&P 500. Even while small cap valuations are compelling, we remain neutral - these companies are much more reliant on floating rate debt and have interest rate sensitivity. 

Bottom line

The weight of the evidence in our work still suggests we are in a bull market, yet this corrective period likely has further to go in price and/or time.

For investors on the sidelines and below target equity allocations, we would use a dollar-cost averaging approach and look to be more aggressive should we get a deeper and more normal correction.  

The latest research & insights