The teflon market – A few risks starting to stick, but the long-term uptrend remains intact

Key Takeaways

After a V-shaped recovery that has seen the S&P 500 gain 18% and the technology sector rally 36% from the March 30 low, there are tentative signs that rising oil prices and interest rates – two of the key risks we recently highlighted – may finally be starting to stick to what has otherwise been a “teflon” market.

A few observations stand out:

• The 18% rebound is broadly in line with the snapbacks we have typically seen after pullbacks since 2009, though this recovery has occurred at a much quicker pace.
• Earlier this week, the S&P 500 reached its most extended level above its 50-day moving average since 2022, while technology moved back above the upward trendline that has defined this bull market.
• This reflects strong underlying momentum, but it also suggests the market may be less able to absorb negative news in the near term, with the rubber band stretched from a tactical perspective.

History also offers an important reminder that sharp rallies can lead to near-term consolidation without derailing the broader trend.

• Since 1950, there have been 16 other periods in which the market gained more than 15% over a 30-trading-day span, as it has recently.
• Over the following month, returns were essentially a coin toss, with no clear bias toward gains or losses. However, over the subsequent 12 months, the market was higher 93% of the time, with average returns in the double digits.

The good news is that even as prices appear in need of a breather, the underlying fundamentals remain supportive.

• At 13%, the upward revision to forward S&P 500 earnings estimates since the beginning of the year is the strongest for any year since 2000 outside of 2021, which was rebounding from depressed pandemic-era levels.
• Consequently, valuations - while far from cheap - remain below where they began the year.

Bottom line

After a sharp move higher, markets appear due for a reset or consolidation phase to allow fundamentals to catch up. In our view, the bull market continues to deserve the benefit of the doubt. However, following the strong recovery and with geopolitical uncertainty still elevated – particularly as we move deeper into the midterm election cycle – we expect the path forward to become bumpier. We would continue to respect the primary trend and view deeper pullbacks as opportunities.

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