A bull-bear debate – Our stance after the bounce and subsequent selloff

Key Takeaway

Our key message since downgrading stocks in late February remains that investors should be more neutral and less on offense relative to recent years given a more mixed risk/reward backdrop. In today’s note, we take a closer look at the bull-bear debate.

Big picture

In February, with the S&P 500 closer to all-time highs, we downgraded stocks to neutral given a more mixed risk/reward backdrop and modestly upgraded our cash position. Indeed, the weight of the evidence had shifted with modest deterioration apparent in economic, earnings, and technical trends.

That said, after a roughly 10% pullback for the S&P 500 between late February and early March, several indicators suggested the market was stretched to the downside and due for a bounce. Markets subsequently rallied almost 5% from the low before rolling over again during the past week.

Indeed, the renewed weakness appears to be a combination of factors causing investor angst:

1. Uncertainty regarding the pending April 2 date, when the administration is set to announce its tariff plans.
2. Economic growth concerns given softening data and GDP estimates that are being revised down by the consensus, while inflation trends remain sticky.
3. Concerns around a potential slowdown in technology spending.

The bull-bear debate

While it’s possible markets may get some relief as investors gain some clarity on the “rules of engagement” around tariffs and “retest the recent low,” our view is the near term is set to remain choppy and markets are unlikely to return to new highs over the near term.

History – A look at 10% pullbacks

• On the positive side of the ledger, when the S&P 500 has pulled back more than 10%, it has averaged a 24% return over the next 12 months, with gains 88% of the time since 1950.
• The main caveat is out of the seven times the S&P 500 did not see gains, six coincided with recessions. Recession is not our base case, but there are growing economic risks.