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Analysis: ‘Belated’ pullback in US stocks to test dip buyers’ resolve

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Analysis: 'Belated' pullback in US stocks to test dip buyers' resolve

By Lewis Krauskopf and Saqib Iqbal Ahmed

NEW YORK (Reuters) – The first sharp decline for U.S. stocks in six months has investors wondering whether to buy the dip or wait for further declines.

After a turbulent few weeks, the S&P 500 is down more than 5% from its March 28 high, the biggest drop since October. While such declines have been rare in recent months, they are not uncommon: The S&P 500 has experienced declines of 5% or more an average of three times a year since 1929, a Bank of America analysis found.

Many market participants believe that the factors that helped the S&P 500 post a 10% gain in the first quarter – including resilient economic growth and excitement about artificial intelligence – remain in place and will support stocks in the long term .

However, this past week the sellers had the upper hand. The S&P 500 fell for the sixth straight session on Friday, the longest streak since October 2022.

While some investors are already banking on weakness, others are waiting for more clarity on the path of inflation, geopolitical tensions in the Middle East and the strength of corporate earnings before taking action.

A pullback is “long overdue,” said King Lip, chief strategist at Baker Avenue Wealth Management. “I think it’s a garden variety correction at this point.”

Lip has started increasing stock exposure for clients and plans to buy more if the stock falls further. Still, he believes the S&P 500 could fall as much as 10% from its March 28 high.

History shows that a strong start to a year is often followed by a big pullback, after which the stock market typically bounces back and continues to climb higher.

The S&P 500 has averaged a maximum decline of 11% every time it gained 10% or more in the first quarter, according to research from Truist Advisor Services. The index has ended the year higher in ten out of eleven cases since 1950.

“We are not surprised that there was a small pullback,” said Sonu Varghese, global macro strategist at Carson Group, who has used the recent weakness as an opportunity to increase positions in small-cap stocks.

“I think buyers will step in,” he said.

Still, investors have become cautious. BofA clients sold $800 million worth of U.S. stocks last week, the third week in a row they were net sellers, the company said last Tuesday.

Meanwhile, some volatility-sensitive funds that bought shares when markets were moving higher have already started selling and could dump more shares as markets become more turbulent. Analysts at Nomura estimate that such funds could dump about $45 billion worth of stocks if the S&P 500 averages a daily move of 1% over the next two weeks.

Investors also keep an eye on the level of the Cboe Volatility Index. Although the index is near a six-month high of 19, some volatility observers believe it has not fully taken into account inflation concerns and geopolitical rumblings that have rattled markets in recent weeks.

“With the current situation in the Middle East potentially escalating, I am surprised that near-term volatility is not higher,” said Seth Hickle, managing partner at Mindset Wealth Management.

“We have repositioned a small number of positions, but I will wait to see what the gains look like before making any major changes to our portfolios.”

In fact, many believe that gains from some of the market’s biggest names could provide support for stocks in the coming week – or further exacerbate the sell-off. Tesla, Meta Platforms, Alphabet and Microsoft will all report in the coming days.

So far the earnings picture is mixed. Shares of Netflix fell on Friday after its plan to stop sharing subscriber numbers from 2025 fueled growth concerns, while Taiwan Semiconductor Manufacturing Co, the world’s largest contract chipmaker, reversed expectations for chip sector growth.

“As the S&P 500’s valuation remains above 20 times forward earnings… any disappointment from the news on the mega tech companies could push this week’s oversold market deeper into oversold territory,” LPL Financial chief strategist Quincy Krosby wrote. Friday at a news conference. remark.

Investors will also focus on Friday’s release of the monthly Personal Consumption Expenditures Price Index, a crucial piece of inflation data ahead of the April 30-May 1 Fed meeting. Stronger-than-expected inflation has eroded a key driver of the bull market, with investors now pricing in around 40 basis points of rate cuts this year, compared with 150 basis points at the start of 2024.

Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder in New York, said he has “made some buying on the dip in very aggressive portfolios” but remains concerned about incoming inflation data.

“Resumption of disinflation is critical” to avert fears of Fed rate hikes, he said.

(Reporting by Lewis Krauskopf and Saqib Iqbal Ahmed; additional reporting by Laura Matthews; Editing by Ira Iosebashvili and Cynthia Osterman)