TLDR
- Wall Street strategists believe the recent stock market rally is temporary with more selling expected
- The S&P 500 has fallen over 10% in less than a month with uncertainty over Trump’s tariff policies being a major concern
- The VIX “fear gauge” has been above 20 for 11 straight trading days, indicating market volatility but not panic
- Federal Reserve meeting on Wednesday could be a market catalyst as investors seek clues about potential interest rate cuts
- April 2nd deadline for Trump’s next wave of tariffs is a key date that may resolve some market uncertainty
The stock market has taken investors on a wild ride lately. After falling more than 10% in under a month, the S&P 500 bounced back with two days of gains.
But many Wall Street experts think this 3% bump doesn’t mean we’ve hit bottom. Deutsche Bank chief strategist Bankhim Chadha wrote that the sell-off in US stocks “has further to go.”
Morgan Stanley’s Mike Wilson agrees. He told clients a “tradable rally” is possible. However, he doesn’t see a lasting rally to new record highs until growth issues are fixed or the Fed cuts interest rates.
What caused stocks to drop in the first place? Growing worry about President Trump’s policies tops the list. How these policies might hurt an already slowing economy has investors on edge.
Fears that the artificial intelligence boom might disappoint have also played a role. Little evidence has emerged to show these fears were overblown.
The market hasn’t shown many reasons for investors who stayed away last week to jump in now. Some stocks are “cheaper” than a month ago when the S&P 500 hit its recent high. But that alone isn’t enough to lure many buyers.
Tariff worries
Surveys show worry about how tariffs could hurt both consumer and business spending. Yet there haven’t been enough hard data points to complete the picture. We haven’t seen major drops in consumer spending, weak job reports, or many companies lowering their profit forecasts.
RBC Capital Markets expert Lori Calvasina points out that market “vibes” help explain why stocks have been hit hard. They also explain rising concerns about the economy’s direction. But these vibes don’t clearly tell us if this is a buying chance, even with the S&P 500 down 10% from all-time highs.
Many strategists still predict the S&P 500 will rebound sometime this year. They just haven’t spotted what will drive stocks higher.
For specific companies, the big question is how much tariffs would hurt profits. We’ve seen small hints so far. Delta Air Lines warned profits will rise less than expected due to weaker domestic demand amid “macro uncertainty.”
A fuller picture of how companies feel about the current situation is nearly a month away. First quarter earnings reports start in earnest on April 11.
FOMC Meeting
Wednesday’s Federal Reserve meeting could also move markets. Investors are looking for clues about whether the central bank will cut interest rates this year.
On a technical level, many signs that the stock market rally was stretched entering 2025 have returned to normal. But they haven’t hit levels that suggest it’s time to buy the dip.
Deutsche Bank’s Chadha notes that investor stock holdings have dropped over the past month. But they haven’t hit the bottom levels seen during Trump’s previous trade war. If stock holdings fall that far this time, Chadha estimates the S&P 500 would drop about 7% more to 5,250.
With an April 2 deadline for Trump’s next wave of tariffs, Chadha hopes for a resolution to the political uncertainty weighing on markets. He wrote that if there’s a “credible plan to resolve tariff uncertainty, it will allow the business cycle to continue.” In that case, he believes the S&P 500 could hit a high of 7,000 this year.
If tariffs aren’t scaled back and fears about the slowing US economy grow, strategists argue stocks have more room to fall. The S&P 500’s forward price-to-earnings ratio has only fallen to its five-year average during the sell-off.
DataTrek co-founder Nicholas Colas wrote that “equity valuations still do not reflect much genuine concern about either economic policy or possibly weakening fundamentals.” He added, “We’d love to tell you that last Monday was the low, but the data says otherwise.”
VIX shows worry but not panic
Wall Street’s fear gauge, known as the VIX, shows worry but not panic. It has been above 20 for the past 11 trading days. This level is associated with volatile markets and losses for shares.
The VIX measures expected volatility in the S&P 500 over the next 30 days. It closed Monday at 20.51, compared with 10-year and 20-year averages of 18.30 and 19.21. Stocks have fallen 4.7% since the start of March.
A “prolonged period of an elevated VIX is a common sign of a bear market,” Colas wrote. “We are not there yet, but a lower VIX would be a good sign.”
Current VIX levels are far from those seen in times of real market distress. In 2018, when the stock market fell 6%, the VIX hit 36.1 on December 24. The VIX has hit above 80 in past recessions.
Over the past five years, once the VIX closes above 20, it takes an average of 13.8 trading days to close below 20 again. Over 10 years, the average is 9.8 trading days.
Strategists expect the VIX to rise, suggesting a strong stock market rally isn’t coming soon. Deutsche Bank’s Chadha wrote that both actual volatility and expected volatility have room to rise further.
Chris Senyek of Wolfe Research believes “the market’s near-term trend remains lower until more clarity emerges on the extent of tariffs.” He noted that while the VIX has spiked, “we haven’t seen true capitulation” – the widespread selling that often occurs before a market rebound.
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