Is there further room for decline in the US stock market in terms of price and time?
The US stock market's crazy rise in 2024 has finally hit the pause button in recent days.
On Wednesday, the S&P 500 index (SPX) and the Nasdaq Composite index (IXIC) suffered their biggest daily drop since 2022, which continued to widen on Thursday. In the past 10 days, the S&P 500 has fallen by about 3%, while the Nasdaq index has fallen more than 6%.
Regarding the recent correction in the US stock market, Keith Lerner, co-CIO of Truist, pointed out earlier that when the S&P 500 index rose more than 10% in the first half of the year, there is usually an average correction of around 9% in the second half of the year.
As of the end of June, the S&P 500 index had risen by about 14%. Lerner wrote in a report to clients on Thursday,
"We have been anticipating recent market volatility and believe that there may be further downside risk for U.S. equities in terms of price and timing."
It is apparent that technology stocks are leading the recent decline in the US stock market. Among the 11 sectors of the S&P 500 index, only information technology and communications services experienced negative returns in the past month. Lerner explained in an interview that given the rise in the technology sector, the recent selling makes sense.
Lerner's research suggests that as of the end of June, technology stocks have outperformed the S&P 500 index in the past two months of rolling performance, reaching the highest level since 2002. He believes that "technology stocks are like an overstretched rubber band, after experiencing extreme excess returns in the market, there is generally a correction, and even a little bad news can have a big impact."
As it stands, the 'little bad news' comes from Alphabet (GOOGL) and Tesla (TSLA) reporting earnings after Tuesday's close. Lerner noted that these earnings reports were not actually bad, but failed to leave a positive impression with investors due to high expectations for this quarter's earnings.
Earnings reports from Apple (AAPL), Meta (META), Microsoft (MSFT) and Amazon (AMZN) will be released next week, which will be the next test for investor sentiment towards the technology sector. Lerner believes that after the recent market correction in the past few days of trading, the latest earnings reports from other technology giants may exceed the expectations that investors have already lowered.
He said, "I think the long-term trend of the bull market still exists and funds will flow back. I just think that the US stock market is more likely to need a rest period, a pause that can revitalize the market."
BMO Capital Markets' chief investment strategist, Brian Belski, also emphasized the possibility of the stock rally pausing. Similar to Lerner's analysis, Belski's research shows that going back to 1949, the second year of a bull market in the US stock market usually experiences an average correction of around 9%. The latest bull market began in October 2022.
Belski said on Tuesday that, from an emotional standpoint, the market "has matured to the point where it needs a correction." But for Belski, this is a "buying opportunity." His research shows that the market usually rebounds an average of 14.5% at the bottom of the correction in the second year of a bull market. He said, "the stock market will rise before the end of the year."