By Jacob Sonenshine

When stocks go wild, buy the dips and sell the rips.

It was a notable week for stocks, to say the least. Yet it yielded a few indicators that should provide some clarity on how to play this market.

After a bleak start to the week, the indexes surged on Wednesday, as President Donald Trump rolled back so-called reciprocal tariffs on trading partners, excluding China. The S&P 500 index popped almost 10%, its largest daily gain since October 2008, while the Dow Jones Industrial Average was up 6.9% and the Nasdaq Composite jumped 12%.

Traders were quick to take profits after Wednesday's gains, with the S&P 500 on pace to finish the week at 5285, still down 14% from its record high of 6144 hit in late February.

It's an object lesson in why buying after supercharged days is dangerous. The market knows that tariffs, however they play out, will hurt the economy, though it's hard to quantify how badly right now. Business and consumer confidence have dropped in recent months, and spending could follow suit. And Thursday's inflation data, which many thought could have outpaced expectations, came in below estimates at 2.4% year over year.

"Softer demand [is] already weighing on [the] consumer price index," writes Citigroup economist Andrew Hollenhorst.

Wall Street analysts are already cutting their 2025 sales and earnings forecasts. Estimates for aggregate 2025 S&P 500 earnings sat at $273 in early November just before the election, according to FactSet. They're at $267 now, and that's likely not the end of the reductions. 22V Research's Dennis DeBusschere says that the money managers he's spoken with expect an average $258 in earnings this year, representing more than a 5% reduction from previous estimates.

That makes sense. Many economists expect the consequences of the trade war to reduce U.S. economic output by just over a percentage point from previous projections. That lines up with analysts lowering companies' sales estimates by low-single-digit percentages, which would dent earnings expectations more because companies can't cut all costs, putting pressure on profit margins.

These numbers aren't a lock, of course. Because the market must wait to see companies' forward-looking guidance on coming earnings reports, stocks currently come with the risk of another large drop.

Enter those looking to buy dips. The S&P 500's key support area -- the level at which buyers have stepped in to support the index -- is just over 4800, says CappThesis founder Frank Cappelleri.

This level reflects much of the potential damage to the economy triggered by tariffs. At 4800, the index would be about 18 times DeBusschere's $258 earnings number. That's way down from the highest forward price/earnings multiple the S&P 500 traded at this year of close to 23 times, and it's at the lower end of its range over the past three years.

From 4800, the market should rise over time, especially if the Federal Reserve steps in and cuts interest rates to stabilize the economy, which is set to rebound next year from any hit this year, as are earnings.

"If these dynamics continue to be reflected in [weak] inflation data this year, Fed officials should feel much more comfortable lowering rates in response," Hollenhorst writes. "We continue to expect 125 basis points of cuts this year." (A basis point is 1/100th of a percentage point.)

Rate cuts and an eventual rebound are reasons to buy stocks more aggressively if the index cracks from here.

"For investors with a multiyear outlook...it may be worth considering whether recent declines offer a more attractive entry point" than before the tariff announcement, write Doug and Lorne Bycoff of the Bycoff Group.

Keep your powder dry, investors.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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April 11, 2025 12:42 ET (16:42 GMT)

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