Assessing the Risks and Opportunities Amid a Potential US Stock Market Correction in Late 2025

The U.S. stock market is at a critical inflection point. Technical indicators are flashing red, with weakening breadth, key moving average breaks, and shifting CTA positioning signaling a heightened risk of correction. Yet, amid the volatility, there are clear opportunities for strategic rebalancing into defensive sectors and undervalued growth stocks. For investors, the challenge lies in navigating the storm while positioning for the next phase of the market cycle.

Technical Indicators: A Bearish Setup

The S&P 500's breakdown below its 200-day moving average-a critical psychological and technical threshold-has triggered alarm bells. This level, which historically acts as a bearish confirmation of shifting sentiment, is now functioning as resistance rather than support. Compounding this, the 50-day moving average has crossed below the 200-day line, forming a "death cross" pattern-a harbinger of prolonged downturns in prior cycles.

Market breadth has also deteriorated sharply. The percentage of S&P 500 stocks trading above their 200-day moving averages plummeted from 64% in early January to 47% by late February 2025. This broad-based weakening suggests the rally lacks the participation of smaller or less-followed names, a classic precursor to corrections.

Meanwhile, Commodity Trading Advisors (CTAs)-systematic trend-followers-are at a crossroads. While they remain heavily long, their positioning is now precarious. Goldman Sachs estimates that a two-standard-deviation move lower could trigger up to $2.3 billion in deleveraging over the next week alone. The Nasdaq-100, in particular, is perched near key unwind triggers, with another 1% drop potentially sparking cascading selling. These dynamics highlight a fragile equilibrium: a market held up by algorithmic momentum but vulnerable to self-fulfilling panic.

Sector Rotation: From Growth to Value

As technical conditions sour, sector rotation is becoming a critical tool for risk management. Defensive sectors and undervalued growth stocks are emerging as compelling alternatives to the overextended tech-driven rally.

Schwab's Center for Financial Research upgraded Communication Services, Industrials, and Health Care to "Outperform" in late 2025, citing their resilience to macroeconomic shifts and alignment with AI-driven productivity trends. These sectors, which had lagged during the AI hype cycle, are now showing signs of catching up. For instance, industrials benefit from infrastructure spending and automation demand, while healthcare remains a safe haven amid demographic tailwinds.

Conversely, high-beta sectors like Consumer Discretionary and Real Estate have been downgraded to "Underperform" due to consumer stress and regulatory headwinds. Morningstar's analysis adds nuance, noting that even traditionally defensive sectors like consumer staples are overvalued, trading at an 11% premium as of November 28. This underscores the importance of precision: investors must avoid overcrowded "safe" plays and instead target sectors with both strong fundamentals and attractive valuations.

Value and small-cap stocks, meanwhile, offer compelling asymmetry. Small-cap equities trade at a 15% discount to fair value, while value stocks have outperformed growth in November 2025. These segments, historically undervalued during growth-led bull markets, are now primed to benefit from a rotation. J.P. Morgan analysts argue that trade policy shifts and elevated tariffs could further tilt growth toward U.S.-centric industries like financials and industrials, adding another layer of tailwind.

Strategic Positioning: Balancing Risk and Reward

For investors, the path forward requires a dual focus: hedging against near-term volatility while capitalizing on long-term dislocations.

1. Defensive Rebalancing: Overweighting sectors like Health Care and Industrials-both upgraded by Schwab-can provide downside protection. These sectors are less sensitive to interest rates and more aligned with structural trends like AI adoption and infrastructure spending.
2. Undervalued Growth: Small-cap and value stocks offer a margin of safety. With valuations at multi-year discounts, they present opportunities to buy into earnings growth that's been overlooked during the AI frenzy.
3. CTA Risk Mitigation: Given the potential for deleveraging, investors should consider short-term hedges or cash buffers. The Nasdaq-100's proximity to unwind triggers means even minor dips could accelerate selling-liquidity management is key.

Conclusion

The U.S. stock market is teetering on the edge of a correction, with technical indicators and CTA positioning pointing to a fragile equilibrium. Yet, this volatility is not without opportunity. By rebalancing into defensive sectors and undervalued growth names, investors can position themselves to weather the storm and capitalize on the inevitable reset. As always, the key is to stay nimble, prioritize fundamentals over hype, and recognize that corrections are not the end of the cycle-but a necessary step toward the next phase of growth.