Has the S&P 500's Correction Passed Its Midpoint? Truist Thinks So

The U.S. stock market has seen some turbulence recently, with all three major indices retreating from record highs. The sharp rise in the 10-year Treasury yield is the primary driver behind the market's pullback.  

Despite the unsettling nature of the correction, Truist's Chief Market Strategist views it as an excellent buying opportunity. The firm believes that the recent selloff is merely an overreaction to short-term price and sentiment adjustments, while stocks remain in a long-term bull market.  

At the close of 2024, investor sentiment reached record highs, with many expecting new market peaks in the coming months. This optimism left the market vulnerable to disruption. When expectations are elevated, even minor negative news can have an outsized impact. The current bad news is the swift increase in bond yields. Historically, whenever the 10-year Treasury yield surged past 4%, it created challenges for equities. "The S&P 500's recent peak on December 6 coincided with the 10-year yield reaching a low point," noted Truist analysts.  

However, it's important to recognize that rising rates largely reflect stronger-than-expected economic data, including last Friday's robust jobs report. Truist emphasizes their preference for a resilient economy that requires fewer rate cuts over a weak economy that demands aggressive monetary easing. Historical evidence from 2000 and 2008 shows that aggressive rate cuts didn't prevent bear markets or recessions.  

Truist analysts also argue that the relationship between interest rates and equities is simply reverting to its pre-2008 financial crisis state. From 1950 to 2007, the average 10-year Treasury yield was 6.2%, with inflation at 3.8%. Despite this, the S&P 500 delivered an average annual total return of 11.9%. A resilient economy should continue to support corporate profit growth, especially as the sensitivity of the economy to interest rates appears lower than in the past. 

 

While rates rising higher certainly increase competition for stocks, Truist expects this trend to stabilize soon. The yield differential between the U.S. and other G7 nations has reached its widest level since 2019, making U.S. Treasuries increasingly attractive to global investors.  

Truist's data analysis shows that the current pullback in the S&P 500 has lasted 35 days with a decline of approximately 4%. Since the market bottomed in March 2009, there have been 30 corrections of at least 5%, with a median decline of 7.5% lasting 28 days. Based on these patterns, Truist believes the market has likely passed the midpoint of this adjustment.  

Broader market sectors have already experienced significant corrections. Small-cap stocks have dropped about 10%, while the equal-weighted S&P 500 index, representing average stock performance, is down 7%. These moves suggest a meaningful adjustment is already underway.

Investment Opportunities Amid the Correction

Truist advises sticking to the long-term uptrend in equities. Investors with below-target equity allocations can use this correction as a gradual buying opportunity. The U.S. remains the firm's preferred market, with a focus on large-cap stocks over small caps. Truist favors sectors like technology, communication services, and financials, while recommending a "modest" position in gold as a hedge.