- Stocks started the year on the wrong foot as a year-end bearish.
- However, Truist’s chief market strategist believes markets are overreacting.
- Investors should deposit their money in the four main countries before a recovery.
US stocks have seen a sharp improvement over the past month, and investors should be thankful for that.
Worries about higher interest rates for longer in the face of a tepid jobs report and the potential for continued inflation have sent the S&P 500 down 4.5% from its peak in early December.
But this pullback will end up being a buying opportunity for those with a strong stomach, according to Keith Lerner, chief market strategist at Truist.
“Pullbacks are always uncomfortable, but they are the price of market entry,” Lerner wrote in a recent note, echoing a statement he made during last year’s dips.
Markets gained considerable momentum after Donald Trump’s victory, which many thought would mean lower corporate taxes and a pro-business regulatory backdrop. That enthusiasm has faded, and the S&P 500 is now not much higher than where it ended on Election Day.
Although this decline was not welcome, some strategists thought it was warranted, considering how much stocks had risen. The consensus among Wall Street firms was that the S&P 500 would post another double-digit gain this year, even after consecutive years of 23% to 24% gains.
“When expectations are high, a little bad news can go a long way,” Lerner wrote.
Truist
Taking a step back now, Lerner believes stocks could advance more meaningfully later in 2025.
“We are seeing a reset in market prices and sentiment, which was stretched to a short-term basis, although it is still within the bounds of a persistent bull market,” Lerner wrote.
History says that most sales don’t last
No one likes to see hard-earned profits evaporate, but it’s essential to keep the downsides in perspective.
The S&P 500 has fallen 5% or more 30 times since March 2009, which is about two such selloffs a year. However, the index has risen 1,087% including dividends since that point in the recovery from the financial crisis, so the opportunity cost of selling would have been massive.
Truist
When U.S. stocks have fallen at least 5% in the past 16 years or so, their cap usually comes after a 7.5% loss over 28 days, according to Truist. The recent retracement has been close to 5% over a 36-day time frame, which leads Lerner to believe it’s already at least halfway over.
Another silver lining is that major parts of the market have already been hit. Small caps are off 10% from their highs, and the typical S&P 500 — as measured by the equal-weight version of the index — has retreated 7%, Lerner noted. This means that the pain can be paid.
4 ways to invest in a hotter-than-expected economy
Investors are angry about the strength of the economy, in contrast to two years ago.
Better job additions mean the Federal Reserve is likely in no rush to cut rates. In fact, there are some on the street who worry that the Fed’s next move will be a hike.
While bull markets need a healthy economy, lower rates are a key part of the optimists’ base case. The market is trading at a high valuation, and if rates remain high for six or more months, investors may reconsider whether it is wise to pay such a premium for future corporate earnings.
However, Lerner believes the market is reacting to fears of higher rates for longer.
“We would prefer a stronger economy with fewer rate cuts than a weaker economy requiring more aggressive rate cuts,” Lerner wrote.
The US economy is humming along, but it doesn’t appear to be in danger of overheating. Truist’s 2025 forecast for US GDP growth is 2.5%, which should underpin solid income growth. That should certainly be the focus of investors ahead of the upcoming fourth quarter earnings season.
“A resilient economy should continue to support higher corporate earnings, and the economy has proven to be somewhat less sensitive to interest rates than historically over the past few years,” Lerner wrote.
Truist
And as long as the U.S. economy holds up, Lerner believes domestic stocks are a solid bet.
“For those investors who are underweight their target equity position, we will use the pullback to average the market,” Lerner wrote.
Truist’s main investment ideas in early 2025 are big hats on smaller stocks, companies in heavy growth sectors such as technology AND communication servicesAND Financewho are an economically sensitive group. Outside of stocks, the firm believes gold is a good hedge.
These recommendations are very similar to six months ago, although technology and financials have replaced the defensive services sector, which has been a recent laggard.
