‘You’re pricing it in absolute perfection’: Top strategists warn a market correction is around the corner – and share a 10-part investment playbook for a quick comeback

US stocks rose after the news. The growth-focused Nasdaq Composite hit another record, as did the S&P 500, which is now up 14% in 2024 after a 24.2% gain last year.

Watch out for the next correction

But instead of popping the champagne, some market experts are suspicious of a pullback.

Adam Phillips, managing director of investments at EP Wealth Advisors, said in an interview that US stocks are weaker than they appear. A handful of megacap growth stocks are generating most of the S&P 500’s gains, he noted, and that the market’s narrow breadth is masking shortfalls in dozens of smaller firms. If these leaders retreat, investors may get a wake-up call.

“A little over the last month, we’ve seen the S&P 500 close to 3%, but over 60% of that return has come from Nvidia,” Phillips said earlier this week. “And if you look at the S&P 500 on an equal-weighted basis, it’s actually produced a negative return over the last month. And so I think it’s really, really important to just look under the hood for signs of the health of the market. shows us that the market is not, potentially, as healthy as it might otherwise appear.”

Until a broader group of stocks outperform, Phillips believes skepticism about this growth is warranted. The companies can catch up to the tech giants by posting outstanding earnings, but they won’t get a chance to do so before second-quarter earnings season begins in mid-July.

Meanwhile, Phillips is concerned by the enthusiastic sentiment from investors, despite the lack of significant market drivers and mixed economic data.

The idea of ​​softer economic growth concerns Anthony Saglimbene, chief market strategist at Ameriprise Financial. Slower inflation is encouraging, although it’s also reasonable to draw a half-empty conclusion from May’s inflation data: the US economy isn’t heating up.

“If we get an economy that looks like it’s slowing more aggressively, which could suggest that the Fed is a little offside or maybe not paying attention to the trends of slowing growth, then I think we could see another correction of 5% or 10%, said Saglimbene in a recent interview.

Higher interest rates for longer are reducing inflation, but they are also hurting the economy, Saglimbene said. That’s why rate cuts can’t come soon enough.

“We’re just piling more pain into the economy the longer rates stay at these levels,” Saglimbene said. And so when you look at backward-looking data like employment, like inflation, I think it’s going to require a much more nuanced response from the Fed — much like what the ECB is doing now to manage growth when interest rates are. at these high levels”.

However, in Saglimbene’s view, investors should not be weary of the coming pullback.

The next pullback is likely to be modest, as those who missed this rally are likely to jump at an opportunity to enter the market. And there’s plenty of dry dust on the sidelines, Saglimbene noted, since the $6 trillion in money market accounts is twice the long-term average.

Whether investors should jump into stocks in light of mixed economic data, raised rates and stretched valuations is another story.

Gene Goldman, chief investment officer for Cetera Investment Management, noted that the S&P 500 is trading at a forward earnings multiple of 21x, which is ambitious against this backdrop.

“High valuations — you need low interest rates, you need low inflation, and we don’t have either right now,” Goldman said in a recent interview. “So you’re pricing in absolute perfection.”

Like Phillips, Goldman noted that growth stocks with very high expectations are supporting returns and market valuation — even though they often underperform in election years. Unless large-cap stocks continue to defy gravity, he’s counting on a significant pullback this summer.

Any market correction is likely to be short-lived, Goldman said. He said the S&P 500 could return to its 200-day moving average, which is just above 4,800. An 11.5% drawdown wouldn’t be fun, but the chief investment officer noted that it would be less than the average drawdown of 14.2%.

The bull case for continued gains

However, some strategists Business Insider spoke to recently shook off the idea that investors should be cautious.

Shep Perkins, a chief investment officer at Putnam Investments, expects US stocks to gradually climb the so-called “wall of worry” as many investors are still skeptical of the rise. Crucially, revenue growth has resumed, which should support further gains.

“The S&P 500’s gains — after a flat period over the past year or so — are starting to re-accelerate,” Perkins said. “And that’s usually a good ingredient for higher stocks.”

Garrett Melson, a portfolio strategist at Natixis Investment Managers, said the S&P 500 could add another 10% to its year-to-date gain as investors who have been light on stocks accept defeat.

“FOMO, I think, comes back into the picture here,” Melson said. “But from a fundamental and technical perspective, I still think the bias is for prices to continue to move higher.”

10 ways to invest despite the risk of withdrawal

Even those who are preparing for a retreat have parts of the market where they are good.

Saglimbene is living up to its call of overweight US stocks due to the country’s strong growth despite the risk of a short-term hiccup. Big hats are more attractive than mid- and small-cap stocks as long as interest rates remain high, he added.

In terms of sectors, Saglimbene is bullish on companies in consumer products sector as the group has defensive attributes and price power, and it is also selectively bullish technology shares as they have seen tremendous growth.

Both Saglimbene and Goldman emphasized the stake in the Europe AND Japan, which have performed admirably this year and should hold if U.S. stocks weaken. Goldman also pointed out value-oriented stocks AND small hatsas both have relatively attractive valuations.

Phillips is more bullish on stocks in less flashy sectors like power AND industrial. Energy firms generate tons of free cash flow and net income, plus they’re a hedge against risks like inflation and geopolitical issues. The latter is also true for defense firms within industries. Industries are also a major beneficiary of increased infrastructure spending, he said.