​​Is a correction looming in US markets?​

​​​S&P 500 at all time highs, but is a weaker patch likely in Q3?

​As we move through 2024, the S&P 500 finds itself at unprecedented heights, having achieved a remarkable 17% gain since the beginning of January. This surge builds upon an already impressive performance from the previous year, reflecting a robust bull market that has defied numerous challenges and sceptics. The index's consistent breaking of record highs has become a regular feature in financial news, fuelling both optimism and concerns about sustainability.

​​Several factors have contributed to this stellar performance. Firstly, the technology sector, particularly companies involved in artificial intelligence (AI), has been a significant driver of growth. Giants like NVIDIA, Microsoft, and Apple have seen their stock prices soar as investors bet on the transformative potential of AI across various industries. Additionally, the broader economic recovery from the Covid-19 pandemic-induced slowdown has bolstered consumer spending and corporate profits, further supporting the market's upward trajectory.

​Another key factor has been the Federal Reserve's (Fed) monetary policy. Despite initial fears of aggressive interest rate hikes to combat inflation, the Fed's more measured approach and signals of potential rate cuts later in the year have provided a supportive environment for equities. This accommodative stance has encouraged investors to maintain their positions in stocks, viewing them as more attractive compared to lower-yielding fixed-income alternatives.

​Analysts grow cautious after strong run

​Despite the market's impressive performance, a growing number of Wall Street professionals are adopting a more cautious stance, particularly regarding the upcoming third quarter. Historically, this period has been known for its turbulence in the financial markets, and several factors are aligning to potentially amplify this trend in 2024.

​One primary concern is the potential for market overheating. After such a strong run, some analysts argue that current valuations may be stretched, leaving little room for error in corporate performance or economic data. Any disappointments could lead to sharp corrections as investors reassess their positions.

​Furthermore, geopolitical tensions and global economic uncertainties continue to loom large. Trade relationships, particularly between the United States and China, remain a source of potential volatility. Any escalation in tensions or unexpected policy shifts could quickly ripple through global markets, affecting sentiment and valuations.

​The ongoing technological disruption across various sectors is another factor contributing to market uncertainty. While AI and other technological advancements have driven growth, they also pose challenges to traditional business models, potentially leading to increased market volatility as industries adapt and evolve.

​Election year and market behaviour

​As we enter the middle of a US presidential election year, historical patterns suggest we may be approaching a period of increased market volatility. Typically, election years tend to see weakness in the stock market from September into October, before a year-end rally often begins to take shape.

​This pattern can be attributed to several factors. As the election draws nearer, policy uncertainties tend to increase. Investors may become more cautious as they attempt to gauge the potential impact of different election outcomes on various sectors and the broader economy. This uncertainty can lead to increased market volatility and potential selloffs as investors reposition their portfolios.

​Moreover, the intense focus on the election campaign can sometimes overshadow other economic and corporate news, potentially leading to knee-jerk market reactions to poll results or campaign developments. This heightened sensitivity to political news can contribute to short-term market fluctuations.

​However, it's important to note that once the election uncertainty clears, markets often experience a relief rally. This rally can be particularly strong if the election result is viewed as favourable for business and economic growth. Historically, this post-election rally has often extended into the year-end, providing a strong finish to what might have been a turbulent period.

​Are pullbacks still buying opportunities?

​While the prospect of a market pullback may seem daunting, many seasoned investors and analysts view such events as potential opportunities rather than mere setbacks. In particular, a correction of around 10%, especially in high-quality stocks, could present an attractive entry point for both new investments and for those looking to add to existing positions.

​The rationale behind this perspective is multifaceted. Firstly, pullbacks can serve as a healthy reset for the market, allowing valuations to come back in line with fundamentals and creating a more sustainable basis for future growth. Secondly, for long-term investors, these dips offer the chance to acquire shares in strong companies at more favourable prices, potentially enhancing long-term returns.

​Moreover, market corrections often shake out speculative excess, leading to a more balanced and rational market environment. This can benefit high-quality companies with strong fundamentals, as investors tend to flock to safety and quality during periods of uncertainty.

​However, it's crucial to approach potential pullbacks with a discerning eye. Not all stocks that drop in price represent good value. Investors should focus on companies with strong balance sheets, consistent earnings growth, and competitive advantages in their respective industries. These characteristics can provide resilience during market downturns and position the company for strong performance when market sentiment improves.

​Still some reasons for caution

​As we navigate through 2024, several key factors are contributing to market uncertainty, each with the potential to significantly impact market direction and volatility.

​The US presidential campaign stands out as a primary source of uncertainty. As candidates present their economic policies and visions for the country's future, investors must grapple with the potential implications of different election outcomes on various sectors and the broader economy. Tax policies, regulatory approaches, and international relations are all areas that could see significant shifts depending on the election result, creating a complex landscape for investment decision-making.

​Corporate earnings represent another critical factor. As the market has reached new highs, expectations for corporate performance have also elevated. Companies now face the challenge of meeting or exceeding these high expectations to justify their valuations. Any widespread disappointment in earnings could trigger a reassessment of market valuations and potentially lead to significant selling pressure.

​Fed policy continues to be a key driver of market sentiment and performance. While the Fed has signalled a potentially more dovish stance for 2024, any shifts in this outlook could have profound effects on the market. Investors are closely watching for any signs of changes in the Fed's approach to interest rates and its assessment of inflation risks. Unexpected policy shifts or changes in economic data that could influence Fed decisions have the potential to cause significant market volatility.

​Additionally, global economic conditions and geopolitical events remain important factors to consider. Trade relations, particularly between major economies like the US and China, can have far-reaching effects on global markets. Tensions in various regions of the world, from Eastern Europe to the Middle East, also have the potential to impact investor sentiment and market performance.