Wall Street Warns S&P 500 Dip Buyers of More Turbulence Ahead

(Bloomberg) -- Wall Street strategists have a warning for dip buyers tempted by Friday’s rout in US stocks: There could be more pain ahead, even as China and the United States are signaling openness to trade talks.

The S&P 500 Index gained 1.6% on Monday, recouping more than half of its Friday losses triggered by rekindling tariff tensions. But to market watchers at firms including Morgan Stanley, Evercore ISI and JPMorgan Chase & Co., stocks are due for skittishness, at least in the short-term, with lofty valuations adding to potential economic damage from the US government shutdown and trade uncertainty.

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“Political and fiscal news, as well as Federal Reserve policy, will likely cause more volatility in the final months of 2025,” said Paisley Nardini, head of multi-asset solutions at Simplify Asset Management Inc. “Reactions to incoming news are more sensitive than usual, a reflection of the fragility of markets.”

Couple that with signs the S&P 500 — now in its fourth year of a bull market — is due for a retrenchment, and it’s clear why anxiety is creeping up. The index has gone 97 sessions without a 5% pullback, compared with its long-term average of 59 days, Bloomberg data show.

‘Not Entirely Over’

Some of Nardini’s peers are turning more cautious too. While investors should view any pullback as a long-term buying opportunity, stocks are at risk of correction in the short run, said Morgan Stanley’s Michael Wilson. If US-China trade tensions aren’t resolved before a November deadline, the S&P 500 may drop to 5,800 in a bear-case scenario, a level that’s 13% below its Monday close of 6,654.72, the strategist wrote in a note to clients.

Over at JPMorgan’s trading desk, head of global market intelligence Andrew Tyler also raised concerns about near-term weakness. While he remains bullish, he urged caution given rich equity valuations, stretched positioning and the elusive trade truce between the US and Beijing.

The S&P 500 plunged 2.7% on Friday after Trump threatened an additional 100% levy on good imported from China, upending a months-long streak of tranquility in US stocks. Dip buyers returned Monday after the White House signaled openness to a trade deal and China’s Ministry of Commerce urged further negotiations to resolve outstanding tariff issues.

Story Continues

“We don’t think it is entirely over,” said Julian Emanuel, chief equity and quantitative strategist at Evercore ISI, referring to Friday’s selloff. Although his team believes a meeting between Trump and Chinese leader Xi Jinping will occur at the end of the month as the White House indicated, “the heightened uncertainty and increased volatility is likely to cause degrossing from active managers — particularly systematic funds.”

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The spat around rare earth minerals on Friday was “a catalyst for an overdue pullback,” he said, adding that a rally of as much as 36% from an April low made the S&P 500 overbought. “September and October never fail to become volatile, year in and year out.”

Support Line

From a technical standpoint, Friday’s selloff saw the S&P 500 retreat to an important trendline support level, according to Mark Newton, global head of technical strategy at Fundstrat Global Advisors. From here, a 5% pullback is possible and would be healthy for US equities ahead of a further push higher into the end of the year, he added.

As the S&P 500 clocked its worst day since April on Friday, options traders evinced few signs of panic, leaving scope for them to be caught offsides in the face of renewed trade jitters. The Cboe VIX Index, which closed at 21.66 last week, remained at fairly “pedestrian levels” by historical standards, said Mandy Xu, head of derivatives market intelligence at Cboe Global Markets Inc. While appetite for crash insurance was subtle, demand for the so-called right-tail hedges went up, she added.

To Thomas Thornton, founder of Hedge Fund Telemetry, the risk is that computer-based strategies, hedge funds and mom-and-pop investors have all crowded into the same megacap tech stocks, raising the possibility of a painful reversal should sentiment sour on the group. Ballooning assets of leveraged exchange-traded funds is another potential risk, he said.

“Sentiment remains elevated with investors complacent,” Thornton said. “The risk of something dangerous happening in the market remains very high.”

--With assistance from Matt Turner.

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