Recent weakness in the stock market is being viewed by many investors as a mere speed bump in a powerful rally that had propelled stocks to a series of record highs. Rather than signalling a deeper unraveling, the pullback is seen as a necessary breather.
A Breather, Not a Breakdown
The S&P 500 has fallen 2.4% over the last eight sessions, as concerns emerged over the state of the U.S. economy and the elevated valuations of artificial intelligence and technology stocks. These sectors have been the primary engine driving the market's gains this year.
Raheel Siddiqui, a senior investment strategist at Neuberger Berman Global Equity Research Department, offered a reassuring analogy. "It's a speed bump. It's not a wall that you're going to ram the car into and have a bit more damage than anyone is planning for," he stated. He further clarified that the preconditions for a more sinister outcome like a recession or a bear market are simply not present.
Strong Foundations Support Risk-Taking
Despite jitters over valuations, the bull market rests on strong underpinnings that continue to encourage risk-taking. Investors point to three key factors: the Federal Reserve's easing of financial conditions, the AI-driven boom in capital expenditures, and a broadly supportive economic backdrop.
Chris Dyer, co-head of Eaton Vance Equity and a portfolio manager in London, noted that he hasn't observed any significant changes in market positioning or sentiment that would suggest a major downturn is imminent. This view is echoed by the performance of the S&P 500, which has not fallen more than 3% from its recent high since the selloff in April subsided.
Volatility is the "Old Normal"
Mike Reynolds, vice president of investment strategy at Glenmede Wealth Management, described the recent activity as "just a reminder that volatility exists and is normal." The current volatility is not seen as stemming from a fundamental shift in the outlook for stocks.
According to Tobias Hekster, co-chief investment officer at True Partner Capital, the market is experiencing "some fear of heights and profit taking." He does not believe a meaningful unwinding of positions has begun. In fact, David Wagner, head of equities at Aptus Capital Advisors, warned that one of the biggest risks for an investor right now would be to overreact and take money off the table.
The longer-term outlook remains positive, with Phil Orlando, chief market strategist at Federated Hermes, suggesting that any near-term volatility should be viewed as a buying opportunity. This optimism is backed by the strength of the U.S. economy, which showed faster second-quarter growth than previously estimated, fueled by strong consumer spending.
Victor Zhang, chief investment officer for American Century Investments, which manages around $300 billion, highlighted the strong fundamental growth in the U.S. and emerging markets. However, with the S&P 500 up 14% and the Nasdaq up 19% for the year, analysts agree that the selloff risks picking up steam if economic news turns negative. As Sam Stovall, chief investment strategist at CFRA, put it, "Bull markets don't die of old age; they die of fright. What they are most afraid of right now is a recession."
