Market Insights: US Correction

The US rebound rally in stocks looks to have further upside potential, but the correction is unlikely over in my view. Morgan Stanley CIO and chief US strategist said in a note yesterday that “major US equity Indices are as oversold as they’ve been since 2022, sentiment/positioning gauges have lightened up considerably, and seasonals are set to improve in the second half of March for earnings revisions and price. Furthermore, recent dollar weakness should provide a tailwind to March earnings season and 2^nd quarter guidance and, if historical patterns hold, the decline in rates should lead to upside in economic surprises. In short, we stand by our view that 5500 on the S&P 500 should provide support for a tradeable rally led by the lower-quality, higher-beta stocks that have sold off the most, and it looks as if it may have started on Friday after the S&P traded at 5505 on Thursday.”

I expect the rebound in the S&P500 to retest the 5,800-resistance level and then struggle to extend higher as “investor dip buying” runs the course and exhausts. Overbought conditions and crowded positioning in the tech sector still have further to go in terms of the unwind. The technical breakdown in the S&P500 below the uptrend in place since 2022 points to the correction unlikely being over and having further to run. However, the big 5,200 support level might prove to be the floor where the S&P500 bottoms out and the correction runs its course. As Mike Wilson foreshadowed above, economic data and improving seasonals could soon kick (and push back on the growth scare narrative) however, this might take several months to play out.

Morgan Stanley said this week “the more important question is whether such a rally is likely to extend into something more durable and mark the end of the volatility we’ve seen year to date. The short answer is, probably not. First, from a technical standpoint, the major indices have suffered significant damage – more than we witnessed in recent 10% corrections like last summer’s. More specifically, the S&P 500, Nasdaq 100, and Russell 1000 growth and value indices have all traded straight through their respective 200-day moving averages, now making these levels resistance rather than support…. At a minimum, this kind of technical damage will take time to repair, if it doesn’t lead to more price degradation at the index level.” These are all fair points, which I highlighted last week.

However, the bull market in US stocks is not over, in my opinion, and the US economy is still resilient. Further, the Fed is now in an easing cycle, and whilst near-term inflation risks from tariffs need to be balanced, the case for further rate cuts is growing as growth slows. As Mike Wilson summed it up this week saying that “it will take more than just an oversold market to get more than a tradable rally. We firmly believe that earnings revisions is the most important variable, and while we could see some seasonal strength/stabilization in revisions, we believe it will take a few quarters for this factor to resume a positive uptrend.” MS is sticking to an end-of-year price target on the SPX well above 6,100.

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