With the S&P 500 up about 23% from its April 7th low and just 3% from the February 19th all-time high, the question of the day is how far can the bulls run before taking a much needed rest?

Yes, it is true that our heroes in horns have produced a handful of healthy "breadth thrust buy signals" during the enthusiastic bounce that have historically led to above average returns over the next 1-, 3-, 6-, and 12-month periods. And yes, the market has made quick work of all the technical levels that were supposed to present key resistance. It is also true that despite all the teeth gnashing, this quarter's earnings season has been largely well received. And then don't look now fans, but it appears that the White House is more interested in making deals all around the globe than burning down the house.

My take is that the current joyride to the upside, which is now six weeks old, has effectively accomplished a couple things. First, as we've discussed, the worst case scenario has been taken off the table. In short, traders spent the seven weeks between February 19 and April 7 assuming the worst. As in surging inflation, crumbling economic growth, and in turn, earnings that were expected to fall off a cliff.

But a funny thing happened on the way to the tariff-induced debacle. Cooler heads prevailed. And it now looks like those economic frowns and disastrous predictions have been turned upside down. From my seat, the sometimes-furious rally has effectively "corrected the correction" as traders have readjusted their views, assumptions, and forecasts.

For example, assumptions about the state of the economy went from worst case to "hey, things might not be so bad after all." Earnings went from "EPS can only go down" to "Well lookie here, most companies are still beating the estimates." And those much-feared inflation numbers? So far at least, they simply haven't shown up.

Panic Early Or Not At All

So... After all the hysterics seen over the last 12 weeks, all the hand wringing, all the fear, and all the predictions made by the all those so-called experts, the S&P 500 now finds itself within spitting distance of where it started. From my perch, this is a perfect example of one of my favorite Wall Street saws related to waterfall declines in the stock market: "Panic early, or not at all!"

However, at some point, all good things on Wall Street tend to come to an end - or at the very least, cool off for a while. As the sayings go, markets don't move in a straight line and trees don't grow to the sky. Experience teaches us that after nearly every big run in the stock market, something comes out of the woodwork to make investors rethink the idea of buying stocks every single day.

Oftentimes the news itself is inconsequential. Remember, it's not the news, but rather how the market reacts to the news that matters.

A Big Bearish Headline?

Take the news that Moody's downgraded the US debt rating after the close on Friday. Granted, the market was not open at the time of the release, but the SPY ETF dropped over 1% in relatively short order.

Could this be the type of thing that causes the bears to get off the bench and back into the game? Sure, why not. After all, stocks are overbought, sentiment has gotten a bit too rosy, and the VIX has reached the lower end of its range. And this, dear readers, is the very definition of a setup for a mean reversion move.

Never mind the fact that Moody's had warned of the downgrade more than a year ago. Or that Moody's was very late to this particular party as both Fitch and S&P Global Ratings had already downgraded US debt some time ago. Or that all the ratings agencies basically lost all credibility after 2008.

But the bottom line is that with valuations back at nose bleed levels, the current setup should give the bears an opening here. For a while, anyway.

Earnings Remain A Long Way Off

One of the things that has given the bulls the benefit of any doubt lately has been earnings expectations. For this year and next. You see, consensus EPS estimates for the S&P 500 are still projected to grow by more than +10% (+10.5% to be precise) in 2025. Yes, this is AFTER all the tariff-related cutting analysts have done (so far). And for those keeping score at home, consensus EPS for 2026 currently stands at +15.6%. Yowza.

While it is easy to argue that stocks should be higher than current levels at some point down the road with this kind of expected earnings, the key is those earnings are still a long ways off. And unfortunately, based on the current level of the S&P, the forward P/E ratio is an eye-popping 23.1.

Then if one includes the growth "expected" in 2026 (for the record, analysts' estimates are usually too high and come down over time), it is important to note that the forward P/E is 20.0. Which of course, isn't cheap by any stretch.

So... Given the recent run for the roses and the degree of uncertainty that remains on the tariff/economic/inflation/earnings fronts, a pullback is to be expected.

And from my seat, it is the "action" during such a pullback that could provide a "tell" about where things go from here. A modest decline to close a gap on the charts and relieve the overbought condition without any real severity could open the door for the bulls. While a new batch of brutal down days could prove to be a reminder that we may not be out of the woods just yet. We shall see.

Thought for the Day:

Not every person's opinion is worthy of your attention or consideration...

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research, a Registered Investment Advisor

Disclosures

At the time of publication, Mr. Moenning held long positions in the following securities mentioned: None - Note that positions may change at any time.

NOT INDIVIDUAL INVESTMENT ADVICE. IMPORTANT FURTHER DISCLOSURES