MW Why the stock market's about to hit a wall, according to this strategist

By Barbara Kollmeyer

The downside potential for the S&P 500 is 10%, upside much less, says Keith Lerner

President Donald Trump's first 100 days marks the worst start since 1973.

Thanks to tariff delays and rising hopes for Fed easing, though, the index is off its 2025 lows reached earlier this month. Have we seen the worst for now? That's one burning questions for investors.

Our call of the day from Truist Advisory Services' co-chief investment officer Keith Lerner takes a stab at that. His view is that the S&P 500 has hit a wall, with near-term upside limited to 5%, but downside possibly of up to 10% if the index retests that 4,835 low.

"Thus, the risk-reward appears less attractive at current levels," Lerner said in a note to clients. "Markets have gone from pricing in a decent amount of bad news at the recent lows to providing less of a buffer should we have a rockier road ahead."

Lerner noted that after the S&P 500's 18.9% correction following the Feb. 19 peak, the market was effectively pricing in a recession likelihood of 65% to 80%.

Since April, the S&P 500 has rebounded 10%, helped by Trump's 90-day tariff pause, and better-than-expected corporate earnings, and for tech, signs that AI demand is still healthy.

Lerner fears markets may have swung too far on the positive side and warns that another batch of bad news could detrimentally hit stocks.

The strategist is less sure of more good news coming our way, saying investors shouldn't count on a "sharp near-term economic recovery," while fiscal and monetary support in the U.S. looks constrained versus Europe and Japan.

Lerner said the entire S&P 500 rebound from those recent lows can be explained by valuation expansion, which basically means the market has decided that stocks should be trading at higher multiples.

"Indeed, a price-to-earnings (P/E) ratio is largely about confidence in the economic and earnings outlook and as emotions can change quickly, so can the valuation level," he said.

The forward P/E ratio for the S&P 500 has dropped around 22 times prior to the recent selloff, to a current 20 times, he noted. That peak was reached at the end of 2024, as markets priced in pro-growth policies from Trump.

But that may be a high bar to return to, said Lerner. "It's hard to justify markets going back to a 22x multiple in the near term, given the current backdrop of weakening economic and earnings trends and heightened uncertainty."

And investors may be forgetting about China's lower cost AI model DeepSeek that suggests that dominant megacap tech stocks should be trading at lower valuations anyway.

Even by applying a currently "optimistic" 21 times forward P/E on the S&P 500 of $278, near-term upside for the index is still limited to around 5,800, he said, of the level that also marked its March peak.

Bottom line, he's taking a more defensive near-term stance. Lerner recently cut equities from neutral to less attractive, and large-caps from most attractive to attractive, cutting also U.S. mid caps to neutral from attractive, and lifted cash one notch from neutral to attractive.

Read: How high-yield bond funds like these can lower your investment risk

The markets

U.S. stock futures (ES00) (YM00) (NQ00) are rising, with Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD02Y steady, the dollar DXY firmer and oil prices (CL00) lower.

   Key asset performance                                                Last       5d      1m       YTD      1y 
   S&P 500                                                              5528.75    7.18%   -1.48%   -6.00%   8.06% 
   Nasdaq Composite                                                     17,366.13  9.42%   0.39%    -10.07%  8.65% 
   10-year Treasury                                                     4.211      -18.90  3.40     -36.50   -47.60 
   Gold                                                                 3325.2     -3.20%  5.31%    25.99%   41.65% 
   Oil                                                                  61.34      -2.15%  -14.09%  -14.65%  -25.86% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

UPS $(UPS)$ beat earnings expectations and is cutting 20,000 jobs.

Starbucks $(SBUX)$, Visa (V) and Seagate Technology $(STX)$ report after the close.

President Trump reportedly plans to ease tariff impacts on autos. China says it will never kneel down over trade talks.

American Airlines $(AAL)$ is suing JetBlue $(JBLU)$ over the end of partnership talks.

The trade balance for March is due at 8:30 a.m., followed by the S&P Case-Shiller home price index at 9 a.m., then consumer confidence and job openings at 10 a.m.

Mark Carney's Liberal Party is set to win the Canadian election.

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The chart

From David Hay at the Haymaker Substack comes an overlooked chart - taken from Rosenberg Research - tracking the ratio of leading to coincident indicators. He said while most strategists tend to ignore the leading economic indicators data, given their premature warnings on recessions, this ratio is "now down to a level that has only been touched in actual recessions for over 50 years. In fact, this measure is lower now than it was during the downturns of 1991 and 2001," he said.

Top tickers

These were the most active tickers on MarketWatch as of 6 a.m.:

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   GME     GameStop 
   PLTR    Palantir Technologies 
   PLUG    Plug Power 
   AAPL    Apple 
   AMZN    Amazon.com 
   NIO     NIO 
   TSM     Taiwan Semiconductor Manufacturing 
   WOLF    Wolfspeed 

Random reads

Rescued Mount Fuji hiker gets re-rescued.

Riveting discourse under way: 100 men versus gorilla.

-Barbara Kollmeyer

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(END) Dow Jones Newswires

April 29, 2025 06:51 ET (10:51 GMT)

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