Inside Markets — Pullback Scenario

A pullback scenario in the 4-5% range is a normal occurrence (~3x/year) in equity markets, while corrections in the 10-15% range usually require a sizeable change in macro fundamentals. The current bull market narrative includes above-trend GDP growth, positive EPS revisions and promised future Fed rate cuts. This benign scenario has resulted in subdued equity volatility, which always leads to multiple expansion. The bullish narrative has recently been challenged but remains intact – at least for the moment. The SPX is only -1.4% below its all-time high and the small downtick doesn’t even qualify as a pullback – yet. We expect to see more downside but have to first assume the pullback scenario rather than the start of a correction. The pullback scenario would conveniently leave the SPX somewhere near technical support at ~5060. Sustained closing levels below ~5000 would confirm a change in trend and put the index on course for a more material correction.