U.S. stocks are on pace for their worst first-quarter performance in five years, having shed more than $5 trillion in value since the accelerated selloff began in mid-February and hoovering near the lowest levels since early autumn.
Tariff risks, which have tested the domestic economy’s resilience and stoked price pressures, have proved to be the most significant downside driver. A host of Wall Street banks trimmed their forecasts for growth, inflation and corporate earnings in the past three weeks.
But with the S&P 500 now back in correction territory, having fallen more than 10% from its Feb. 19 peak, and at least a small degree of clarity on tariffs expected later this week, some analysts and investors are debating whether now is a good time for investors to buy the dip heading into first-quarter-earnings season.
LSEG data estimate Q1 S&P 500 profits rose 8% from a year earlier to $507.2 billion. Full-year earnings are still expected to grow by double-digits percent to around $269 a share.
The S&P 500 is on pace for its biggest first-quarter decline in five years and the biggest post-election slump since 2009. TIMOTHY A. CLARY/Getty Images
James Demmert, chief investment officer at New York-based Main Street Research, argues that the current pullback reflects a healthy reset more than than a harbinger of more declines to come. He sees echoes of the October 2022 bear-market bottom, which developed into a two-year rally.
“Market retests are relatively common during corrections, and the fact that we are seeing this retest play out within weeks is further confirmation that we are in a correction and not a bear market,” said Demmert, who pegs his year-end price target on the S&P 500 at 7,050 points. That’d be a 26% increase from the March 28 close.
“Next Friday is the start of earnings season, which is exactly the kind of catalyst this market needs to move past this correction,” he added.
“We expect earnings to be much better than expected, especially since the bar has been lowered across the board due to this market correction.”
Chris La Rosa, vice president of the value-investment team at Gabelli Funds, sees tax reforms, fiscal stimulus and favorable regulations from President Donald Trump’s second administration as growth catalysts.
“Strong consumer spending, improving business investment and a more favorable policy backdrop are expected to drive economic expansion, even as markets continue to grapple with higher interest rates and inflationary pressures,” he said.
“This environment creates a favorable backdrop for U.S. equities, which tend to benefit from stronger domestic growth and pro-business policies.”
However, JP Morgan analysts led by Mislav Matejka, note that while the market looks oversold by some metrics, the chances of a turnaround during the second Trump administration face stiffer challenges than during the first tenure.
Matejka said stocks were cheaper at the start of Trump’s first time, with the S&P 500 trading at a valuation of 17 times forward earnings, while policy objectives and the broader economy were largely understood.
At present the S&P 500 is trading at 21 times forward earnings, roughly where it was in early November, while growth is slowing and uncertainty about policy — from trade to immigration to government spending — is rampant.
Tech stocks in particular are in a very different place, with the so-called Magnificent 7 down 12% for the quarter but still trading at around 27 times earnings, suggesting more declines to come, with questions about artificial-intelligence spending and growth in capital spending being raised. These could drag on indexes like the S&P 500 and the Nasdaq.
“[In] Q2 and Q3 the headwinds of a renewed activity air pocket, further trade uncertainty and the challenging inflation backdrop will all dominate, pressuring equities and bond yields lower and driving defensive market internals,” Matejka and his team wrote.
“Many clients we speak to expect an improvement, and policy pivot to [a] more market-friendly agenda from [here. But] we are skeptical of this. We anticipate further bouts of profit-taking, at least through the first half of this year,” they added.
Lisa Shalett, chief investment officer and head of the global investment office at Morgan Stanley Wealth Management, is similarly cautious. She argues that “concerns about a ‘no-landing’ economic scenario have morphed into unease about recession or stagflation, testing any bullish thesis for the broader market.
“We believe the bullish equity narrative that predominated from October 2022 to January 2025 is broken — undermining the durability of a ‘buy the dip’ strategy focused exclusively on the passive, market-cap-weighted index,” Shalett wrote in her regular weekly update.
More Economic Analysis:
“That said, while the narrative that drove markets since October 2022 is in the rear-view mirror, we see reasons to be selectively constructive,” she added. Data from the retail, housing and industrial sectors could support near-term GDP growth, she said.
“While that stability may prove fragile, there is cause to believe the economy is still growing, creating opportunities among fairly valued stocks, especially in health care, financials, industrials and consumer media,” she added.
