Equities in Focus

Another Correction on Deck?

Elevated valuations, pockets of froth (e.g., unprofitable technology stocks’ strong run), uncertainty around a potential Federal Reserve rate cut in December and the risk of rising unemployment recently have some market participants bracing for a correction. While they may be proven right, and whether a pullback is caused by what they foresee or not, take heart! As Display 1 illustrates, corrections are not an uncommon occurrence. In fact, we’ve already experienced one earlier this year, courtesy of the reciprocal tariff drama. History shows that such pullbacks are often temporary pauses in longer-term uptrends.

Not Your Average Bull

While the S&P 500 has delivered strong returns since its October 2022 low, both the magnitude of this bull phase and its duration remain below historical averages (Display 2).

Moreover, while unemployment has been a key concern among many Federal Reserve governors, the market appears more attuned to inflation’s direction. The S&P 500’s trajectory has closely mirrored the decline in the Personal Consumption Expenditures (PCE) Price Index (a favored inflation measure of Fed policymakers), as shown in Display 3, and underscores the market’s sensitivity to inflation dynamics.

Our View

To be sure, large-cap markets have been propelled by expanding price/earnings ratios, disinflation and Fed easing over the last three years. But if inflation continues to moderate into next year and corporate earnings maintain a healthy pace throughout the market-cap spectrum, as we expect, the fundamental backdrop remains supportive of additional and broader stock market gains.

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