By Martin Baccardax
Stocks are staging a solid recovery on Monday following last week's slump, with the S&P 500 clawing back around a quarter of Friday's 200 point drop, but the market's next move remains a hot topic of debate on Wall Street.
There is no clear narrative emerging among investors as to what happens next, particularly now that the first quarter earnings season has drawn to a close, the summer liquidity lull is about to descend, and key issues tied to inflation and Fed rate forecasts point to higher borrowing costs over the back half of the year.
Savita Subramanian, head of U.S. equity strategy at Bank of America and a broader market skeptic during much of the tech-paced rally that began in late March, thinks the easy market gains might be behind us.
"Strong index performance has masked internal drama; dispersion of returns has jumped to post-Covid highs," she said. "Red flags emerged over the past month, pointing to a soft patch ahead for the index and for tech."
In tech, Subramanian also notes, the spread between the best and worst performers of the sector has risen to the highest since February 2000, just prior to the market's peak the following month.
"We see opportunity in S&P 500 stocks, but not the overall cap-weighted index," she added. "Our year-end target of 7100 suggests 6% downside from here."
Monday's recovery comes after Wall Street last week faced its sternest test in months, with tech leading a broader market tumble tied to accelerating bets on a Federal Reserve rate hike and the backdrop of increasing tensions in the U.S. war with Iran.
The stock market slump, the worst since last October, also came amid solid labor market data that triggered a jump in Treasury bond yields and the repricing of Fed rate bets. Further moves higher in global oil prices and a notable leap in broader volatility gauges, meanwhile, point to significant market jitters over the final weeks of the second quarter.
Morgan Stanley's Mike Wilson, however, sees further gains ahead, even following last Friday's 10% slump for the PHLX semiconductor index, a move that signals a technical correction for the market's most important sector.
"Markets rarely move in a straight line at the pace seen since the March lows, and a correction was inevitable and ultimately healthy if this bull market is going to extend into year-end, which remains our baseline with an 8000 S&P 500 target," he said.
"With the improving fundamental and macroeconomic backdrop, a correction in the crowded momentum areas could restart the broadening trade," he added.
Nancy Tengler, CEO and chief investment officer at Laffer Tengler Investments, is similarly sanguine.
"If we're in a bubble, then it'll pop, but I'm not convinced we're there yet," she said, adding that investors are likely freeing up capital heading into this week's key market event, the $1.8 trillion SpaceX IPO, by taking profit in stocks that have already outperformed.
"There's still a tremendous amount of skepticism, which is a good thing for investors because markets tend to climb a wall of worry," she added. "I think what we're seeing in the short term is a flight toward what's next."
Externalities in the stock market, however, could cause a rethink for everyone, especially in a week when Kevin Warsh, the new Fed Chairman, will hold his inaugural press conference just hours after data from the Bureau of Labor Statistics is released detailing the scale of inflation pressures in the world's biggest economy last month.
With futures markets indicating the central bank's next move is a hike, albeit one that isn't likely to come before the final month of the year, and oil prices back trending toward the $100 a barrel mark, CPI readings will take on a greater importance over the summer months.
Hotter than expected inflation will both test the market's resolve and "throw a bucket of cold water on momentum," said Jay Woods, chief market strategist at Freedom Capital Markets. "Treasury yields will likely move higher, rate-hike expectations will grow and high-valuation growth stocks along with small-caps could see the most pressure."
"A cool print may be the green light bulls need to keep chasing new highs," he added.
All that said, stocks are still up more than 8% for the year, and some 14% higher since the start of the second quarter, leaving a lot of room to cushion on the downside if the tech-led weakness extends into the summer months.
But with midterm elections looming, and the U.S.-Iran war dragging into its 100th day, Wall Street arguably faces a lot more questions now than it did at the start of the year.
Write to Martin Baccardax at martin.baccardax@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
June 08, 2026 13:01 ET (17:01 GMT)
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