Bumpier path & tech reset, though primary uptrend in place

• The bull market remains intact, but the path is getting bumpier.
• Tech is resetting after an extreme stretch of outperformance, though the longer-term outlook remains favorable.
• Under the surface, recent weakness has been more about rotation than a broad-based selloff.
• Small caps remain a partial hedge against sharp tech-led rotations – a theme from our annual outlook that holds today.
• Expect a choppier path through the summer and into midterm election season. Still, the bull market deserves the benefit of the doubt, and pullbacks toward support levels would be viewed as an opportunity for underweight investors.

After a historic 9-week winning streak to end May, stocks have hit a bumpier stretch in June. The S&P 500 has pulled back about 3% from its recent peak, while tech is down roughly 9%.

The selloff coincided with the 10-year U.S. Treasury yield grinding higher, driven by a stronger-than-expected employment report and a hawkish repricing of the Federal Reserve (Fed) outlook. A sharp tech reset and lingering geopolitical uncertainty around the Middle East have added to the pressure.

The bull market trend remains intact, but we have been expecting a bumpier near-term path following such a historic rally. After such a strong run, investor expectations had reset higher, reducing the market’s ability to absorb negative news.

Several indicators pointed to elevated complacency heading into the modest setback we have seen recently. The most recent BofA fund manager survey showed a record monthly rise in equity allocations and a large cut in cash levels, while downside hedging in the options market fell to among the lowest levels in recent years. At the same time, key risks, including higher interest rates and new supply from IPOs, are now weighing on markets.

That said, perspective matters. Markets are often two steps forward, one step back. Recently, it’s been more like three steps forward without much of a pullback.

• Following the prior 9-week winning streaks, the market was down the next week 7 out of 10 times, making the recent weakness normal from a historical standpoint.
• Importantly, a year later, markets were up 8 out of 10 times, suggesting strong momentum is often a positive longer-term signal.
• The S&P 500’s roughly 20% rebound from the lows was also close to the 19% average for all rebounds following pullbacks since 2009. A pause or giveback after a move of that magnitude is historically typical.

Tech – Stretched and resetting

Tech recently reached a record-high sector allocation of nearly 40%. The rebound from the March lows was even more extreme:

• The sector gained about 47% to its recent peak — roughly 20 percentage points more than the next-best sector and more than double the S&P 500’s return over that period.
• Tech moved more than 25% above its 200-day moving average, the most stretched since the July 2024 peak and well above its trend channel since the bull market began in late 2022.
• Tech is now down 9% from its recent peak, while the next-worst sector is down less than 3%. Given its prior outperformance, it’s not surprising to see tech get hit harder on a pullback. Some of the selling is also likely related to jitters around new supply from upcoming megacap IPOs and recent tech equity offerings.

Rotation, not breakdown

Notably, six of the 11 S&P 500 sectors are up since the S&P 500 peaked recently, with many prior laggards and defensive areas outperforming, including health care, real estate, and staples. What we’re seeing is rotation from an overheated area into parts of the market that had lagged.

On the rate front, the shift has been meaningful:

• A month ago, the market was pricing in an 85% chance of the Fed holding rates steady or lower.
• Today, it’s pricing in a 70% chance of a rate hike by year-end.
• While a strong economy should ultimately support stocks, there is near-term tension around higher rates and tighter financial conditions.

Earnings remain supportive

Underlying profit trends for the broader market and tech remain positive. Forward earnings estimates are at record levels for the S&P 500, tech, and small and mid caps. This is still an earnings boom. We view the recent setback as more of a market reset than a change in the underlying trend.

Key support levels

The S&P 500, which closed Tuesday at 7,387, has key support at:

• Rising 50-day moving average: 7,215
• Secondary support zone: 6,900–7,000

The market and tech uptrend remains firmly in place, but it’s often two steps forward, one step back — and recently we’ve had three steps forward.

A step back in some of the hotter areas of the market, such as tech, that allows expectations and prices to reset is to be expected and healthy for the long-term sustainability of the bull market.

In the meantime, small caps can serve as a partial portfolio hedge against sharp tech-led rotations — a theme from our annual outlook that remains relevant today.

The bumpier market path is likely to continue through the summer months and as midterm elections come into greater focus.

Still, the bull market deserves the benefit of the doubt. If markets pull back toward support levels, we would view that as an opportunity for investors who are underweight equities to be more aggressive.

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