We are in a period of decline in the stock market, where investors are beginning to wonder whether the alarmists are true realists. Although somewhat inadvertently, this sustained pullback, extending into a fifth straight week and sending the S&P 500 down 9% from its peak two months ago, did nothing to trigger the kind of cleansing panic and indiscriminate liquidations that create a buy-and-shut-the-headlines scenario. I continue to argue that investors were right to remain mindful of the “upside risks” if the Iran conflict and energy shock were contained by a hasty declaration of victory by the White House. Markets are moving along a spectrum of probabilities, from the bullish “rapid de-escalation” to the most hopeless extreme, “hopeless quagmire.” The longer the fighting and transportation disruptions drag on, the worse and more alarming the cumulative effects will become, and the more initially alarmist views about $200 oil and stagflation begin to seem plausible. Since no one knows for sure how things will go from here, handicapping the market becomes an exercise in monitoring extreme conditions to develop its prices amid enough potential economic turmoil to generate a cushion against further downside. The collective conclusion of technical market observers is “not enough yet.” The S&P 500 has failed to maintain some reasonable support metrics (100-day and 200-day moving averages, Q4 lows). The continuation of the short-term downward trend means that not even a quick 4% recovery rally, which could occur at any time with a social media post or a temporary drop in energy prices, will be able to convincingly reverse the trend. Somewhat surprisingly, similar studies have shown that in the past, the S&P 500 index has experienced poor short-term returns on average after five consecutive weeks of declines, rather than forced snapbacks. When the index declines, the burden of proof for bulls increases, even as it improves the risk-reward relationship for very long-term investors. The pace of the market over the past few months has some uncomfortable similarities to the path it took in early 2025 to the height of the tariff panic. Last year, stocks peaked in late January and stayed there through February, before tech stocks and momentum fell and expectations for tariffs weighed on the index. This year saw a further unwinding in tech stocks after hitting modest highs in February, followed by growing uncertainty over the outcome of the Iran conflict and mounting pressure after the president set a notional deadline for any negotiations. As of the last Friday of March last year, the S&P 500 stock index had fallen 9.1% from its peak. As of the last Friday of March this year, the S&P 500 index is down 9.1% from its all-time high. Of course, in 2025, the details of “Liberation Day” were much more extreme and incoherent than expected, resulting in a massive flush that briefly sent the index down to a 20% drawdown through early April. It would be almost strange if the situation continued to align so closely, but it would serve as a reminder that there is a “gradual then sudden” rhythm to market declines, and that a slightly oversold market like the current one may be able to recover in time for an easing recovery, but not quite as close in terms of price levels. A final note on such comparisons: Last year’s tariff panic-induced stock market decline was clearly a severe overshoot in retrospect, enough to send the S&P 500 up 40% in six months. Corrections may stop before reaching such extremes, and once the moment of perceived peak uncertainty has passed, the energy for a perhaps dramatic rise may diminish. We don’t know where or how this will end, but it’s worth checking out what has been achieved with the exit and whether the value is starting to surface. Valuations Fall Valuations are back to the lower end of their three-year range, with the Nasdaq 100 forward price-to-earnings ratio at 21.5, nearly down to its post-“Liberation Day” low, and the S&P 500 index at 19.4, down from an October high of 23. The caveat here is almost self-evident. Only in a post-pandemic bull market driven by artificial intelligence, nearly 20 times forward earnings could be the lower bound for valuations. Current earnings forecasts are flattered by a jump in estimates for semiconductor and energy companies, while still not accounting for the frictional effects of significantly higher energy, chemical and transportation costs and an unhelpful rise in U.S. Treasury yields toward the top of their one-year range. From a broader perspective, Wall Street has done a decent job of justifying recent historically high valuations by pointing to the high-quality nature of America’s largest companies, exemplified by the comfortably high returns and abundant free cash flow of “asset-light” mega-cap tech platforms. This calculation is now complicated by the fact that both of these companies are spending most of their free cash flow to become “asset-rich” data center operators to fuel runaway AI computing demand. Oh, and at least three large overgrown startups, SpaceX, OpenAI, and Anthropic, are said to be lining up for initial public offerings with a combined market value of more than $3 trillion. That’s more than 5% of the S&P 500’s market capitalization, but only free-floating stocks count toward a company’s index weighting. This is a year in which stock buybacks are on the decline due to huge capital investment demands. It’s unclear whether this is a useful tape to explore for potential bullish nuances, but big bank stocks (a recent trouble spot as private credit woes continue) have held their ground in a slippery tape for the past three weeks. Semiconductor stocks, the last remaining remnants of the tech stocks’ dominance, are in turmoil, with some memory stocks seeing significant profit-taking. But sometimes, before things can get back on track, a former guiding group or supposed safe haven needs to buckle before they retreat. John Flood, head of Goldman Sachs’ equity trading desk, said this morning that it’s “spooky” that regular fund managers haven’t made many layoffs yet. “For a long time since the war began, only trading activity (particularly asset managers and (sovereign wealth funds)) has been essentially absent from our desks (except in some temporary circumstances). It’s eerie,” he wrote. “The word that gets thrown around a lot is frozen. I’m concerned that we’re getting close to a point in this dispute where the (long-only) community is unfrozen and starts to reduce some real risk.” ETF outflows are only beginning to reverse after historic stock market inflows around the start of the year. Wall Street strategists as a group have yet to lower their lofty index targets for 2026, even giving Barclays a bogey last week. Financial conditions are tight, with Treasury yields, oil, volatility, and the US dollar all rising. In terms of potential downside targets, attention is currently focused on a zone 3-4% below the S&P 500’s Friday closing level of 6,150. This puts it on track for a peak in February 2025, ahead of a nearly 20% tariff-induced decline, a level last seen paving the way for a rise from last June’s “Liberation Day” lows. Under these circumstances, it will not be possible to factor in an indefinite crisis or economic recession. But while it definitely represents a proper reset of valuations and expectations, and fits perfectly with the kind of meaty setbacks in the multi-month midterm election year that history has told us all to expect, the moment feels even scarier when combined with some truly frightening headlines and ominous signs.
