Market To Pullback By May, Then Race To New Summer Highs | Mark Newton @Fundstrat_Direct

Breadth improvement preceded the rally

The percentage of stocks above their 20-day and 50-day moving averages jumped substantially in mid-March while new lows diminished, signaling a bottom before the S&P reflected it.

Defensive rotation signaled risk-on

Consumer staples deteriorated sharply in March, indicating institutional positioning was shifting away from safety and suggesting the correction was ending.

Historic recovery velocity

The market gained 12% in 14 trading days, marking the fastest recovery from a 100-day low to a 200-day high on record, surpassing the previous benchmark from October 2014.

Rally without capitulation

Unlike typical bottoms, this surge occurred without extreme oversold conditions or excessive downside volume, driven instead by CTAs reversing $85 billion in short positions.

Oil decline enabled stabilization

Crude oil's rapid drop from $115 coincided with market bottoming as cross-asset pressures including a rising dollar and higher rates simultaneously backed off.

Political pressure to resolve conflict

The administration faces election-year necessity to prevent $100 oil during driving season, creating urgency to reopen the Strait of Hormuz before November midterms.

Historical conflict patterns

Markets typically bottom within 3-4 weeks of major geopolitical conflicts starting, similar to 1942 during WWII when equities turned higher despite ongoing global warfare.

Extended conflict timeline expected

While Newton predicts the Iran war continues through September-October, he anticipates temporary agreements allowing the strait to reopen intermittently.

Mid-May pullback likely

Newton expects the market to give back 3-5% of recent gains by mid-May after getting overextended, before resuming a rally to new summer highs.

Earnings momentum supports bullishness

Analysts are raising earnings revisions as AI productivity gains create deflationary pressure that could allow the Fed to cut rates without sparking inflation.

Uneven sector participation

Only the Technology sector has reached new all-time highs among the 11 S&P sectors, requiring participation from Financials, Industrials, and Discretionary for healthy breadth.

Rate cuts priced out

Markets have eliminated expectations for 2025 rate cuts, shifting focus entirely to corporate earnings and economic resilience rather than monetary easing.