We’re at that moment in a stock market retrenchment when investors begin to wonder whether the alarmists are the true realists. The persistent, if somewhat grudging, retreat has stretched to five straight weeks, taking the S & P 500 to a 9% decline from its peak two months ago, without quite triggering the sort of cleansing panic and indiscriminate liquidation that can set up a “close your eyes to the headlines and buy” setup. I continue to insist that investors have not been wrong to remain mindful of “upside risk” in the event the Iran conflict and energy shock were contained by a hasty declaration of victory by the White House. The market has been moving along a spectrum of probabilities running from “rapid de-escalation” on the bullish end to “hopeless quagmire” at the most desperate extreme. The longer the fighting and shipping disruptions last, the worse and more worrisome the cumulative impact becomes, and the more plausible the initial alarmist views about $200 crude oil and stagflation begin to seem. Because no one knows with clarity how things will proceed from here, handicapping the market becomes an exercise in watching for extreme conditions to develop that price in enough potential economic disruption to generate a cushion against further downside surprises. The collective conclusion of technical market observers is “Not quite yet.” The S & P 500 has failed to hold several plausible support thresholds (the 100- and 200-day moving averages, the fourth-quarter low). The dogged short-term downtrend means that even a quick 4% relief rally — which could come at any time on the strength of a social media post or fleeting downtick in energy prices — wouldn’t turn the tide convincingly. Somewhat surprisingly, in the past, five-week losing streaks for the S & P 500 have been followed by poor near-term returns on average rather than forceful snapbacks, according to multiple such studies. As indexes go down, the burden of proof on the bulls goes up, even as the risk-reward equation for very long-term investors improves. The market cadence of the past few months has some uncomfortable resemblances to the early 2025 path leading up to that tariff-panic crescendo. Last year, stocks peaked in late January and hovered there into February before a tech/momentum selloff and then anticipation of the tariff rollout pressured the indexes. This year, we got a marginal high in February followed by a further tech-stock unwind and then anxiety over the path of the Iran conflict, building pressure as the president has set out notional deadlines for some kind of negotiations. As of the final Friday of March last year, the S & P 500 was down 9.1% from its peak. As of the final Friday of March this year, the S & P 500 is down 9.1% from its peak. In 2025, of course, the “liberation day” details were so much more extreme and incoherent than expected, we got a massive flush that briefly dropped the index to a 20% drawdown into early April. It would almost be bizarre if things continued to match up so closely, but it serves as a reminder of the way market declines can have a “gradually, then suddenly” cadence, and how a somewhat oversold market like the current one can be close in time to a relief rally, but sometimes not quite as close in terms of price levels. One final note on such comparisons: Last year’s tariff-panic sell-off was clearly, in retrospect, a severe overshoot, so much so that it set up a six-month, 40% surge in the S & P 500. Corrections can stop short of such extremes, and then perhaps create less energy for dramatic upside once the moment of peak perceived uncertainty passes. Not knowing where or how this ends, it’s worth reviewing what’s been achieved with the pullback and whether value is starting to surface. Valuations fall Valuations are back to the lower end of their three-year range, the forward price/earnings ratio of the Nasdaq-100 at 21.5, nearly down to its post “liberation day” low, and the S & P 500 is at 19.4, down from a high of 23 in October. The caveats here almost write themselves: Only in this artificial intelligence-propelled, post-pandemic bull run could almost 20 times expected earnings represent a valuation floor. The present profit forecasts are being flattered by surging estimates for semiconductor and energy companies without yet reflecting any frictional effects of the massive jump in energy, chemical and shipping costs, nor the unhelpful rise in Treasury yields toward the top of their one-year range. From a wider lens, Wall Street has done a decent job of justifying recent historically high valuations by pointing out the higher-quality nature of the largest U.S. companies, exemplified by the effortless high returns and copious free cash flows of “asset-light” mega-cap tech platforms. This math is now complicated by the fact that these companies are all spending most of what would be their free cash flows to become “asset-heavy” data-center operators to facilitate runaway AI-computing demand. Oh, and at least three massive overgrown startups — SpaceX, OpenAI and Anthropic — are said to be queuing up for initial public offerings at a collective $3 trillion market value or more. That’s equivalent to more than 5% of S & P 500 market capitalization — though only the freely floated shares would count toward the companies’ index weighting. This in a year when share buybacks are ebbing due to huge capital-spending demands. It’s unclear whether this is a tape where it’s fruitful to hunt for potentially bullish nuance, but big bank stocks — a recent trouble spot as the private-credit travails persist — have held their ground over the past three weeks in a slippery tape. Semiconductors, the last remnant of tech-stock leadership, have wobbled, including some severe profit-taking in memory stocks. Yet sometimes a pullback needs the former leadership groups and perceived safe havens to buckle before things run their course. ‘It’s eerie’ John Flood from the Goldman Sachs equity trading desk notes this morning that rank-and-file fund managers haven’t retrenched very much yet. “Since the start of the war long only trading activity (specifically asset managers and [sovereign wealth funds]) on our desk has essentially been nonexistent (aside from some one-off situations). It is eerie,” he wrote. “The recurring word being thrown around is frozen. I worry that we are now approaching the point in this conflict where the [long-only] community will become unfrozen and start cutting some real risk.” ETF outflows have only begun to reverse after historic gushers into equities around the turn of the years. Wall Street strategists as a group have not yet lowered the lofty index targets they had entering 2026, and Barclays last week even raised its bogey. Financial conditions are tightening, with Treasury yields, oil, volatility and the U.S. dollar all climbing. In terms of potential downside targets, attention is now zeroing in on a zone that sits 3%-4% below Friday’s closing level, around 6,150, for the S & P 500. This pulls toward the February 2025 peak that preceded the tariff-induced near-20% drop, a level last seen open the way up from the “liberation day” bottom in June of last year. This would surely not price in an indefinite crisis or a recession ahead. But it no doubt would represent a proper reset of valuations and expectations, fully conforming with the sort of meaty multimonth midterm election-year setback that history told us all to expect — yet which feels scarier in the moment when paired with genuinely frightening headlines and foreboding signals.
Mike Santoli: The burden of proof rises for bulls as stock market is mired in 5-week losing streak
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