Stocks' shaky Q2 start: Are further pullbacks expected now?

After opening in the green, stock market indices (^DJI, ^IXIC, ^GSPC) have since reversed course Wednesday morning, continuing downside trends in 2024's second quarter. Wall Street experts have described the current market environment in 2024 as still catching up to prior years' benchmarks.

Yahoo Finance's Josh Schafer reports on the path forward for stocks in 2024 outlined by several Wall Street firms gauging the expectancy of further market pullbacks.

For more expert insight and the latest market action, click here to watch this full episode.

This post was written by Luke Carberry Mogan.

Video Transcript

MADISON MILLS: Stocks are climbing higher almost an hour into the trading day, looking like a mixed picture across. The board of the NASDAQ just switched over into relatively unchanged territory here, not a ton of momentum, though, with the S&P 500 snapping their three-day losing streak after dropping over 3% over the past couple of days here.

That coming after strong economic data and sticky inflation, causing investors to question rate cut expectations. So is the market still pricing in smooth sailing for the Fed? Likely not. Our very own Josh Schafer here with more. Josh, what's going on?

JOSH SCHAFER: Yeah, probably not smooth sailing, right, guys? And I think that's sort of what investors should expect, even though that's not what we got for the first quarter, right? So we wrote today in our Yahoo Finance Morning Brief newsletter specifically in our chart of the day, it was from Keith Werner, over at Truist.

And he highlighted this chart here, which is your average decline that you see in the S&P 500 in a given year. The average pullback there is your dotted line. That's 14%. Right now, this year, we've only had an interior pullback of 4%.

This is basically to say on average, all else equal, we normally come back a little bit more than this. And I think it was just a good reminder for people after this just sort of ripping rally that we've had over the last couple of months that it is OK for stocks to pull back. It is normal for stocks to pull back.

There are plenty of strategists that would come on this air and might tell you it is actually good for stocks to pull back and not just go up in a straight line.

And I think the other thing to point out with that is if we do get a bigger drawdown, right, and you think about some of the years you saw on that chart 2020, 2016, 2010, 2009-- we had rather massive drawdowns in those years. You could see the light blue dots go significantly down. Pick out a year, like, 2020, just a couple of years ago. The drawdown is huge, but stocks actually closed higher for the year.

So basically to say, be patient, weather the storm. That seemed to largely be Keith Werner's advice from Truist here. But he did say he thinks the path forward is going to be a little bit bumpier, guys. And I think we heard some of that this week in commentary from Chair Powell and other news.

SEANA SMITH: We have heard that. And also to his point there, you look at some of the fundamentals of the market, right, especially when we talked-- we were just talking to Belski last hour. And he was saying it all comes back to earnings, right. We could talk all we want about what the Fed is going to do next. Yes, ultimately, it does matter at some point here.

But really, the driver of the market this year, and what is really riding on is how strong earnings results are going to be, not only for this quarter, what we're in the middle of getting right now, but also what that path forward looks like for the rest of the year. And you couple that with the fact that the economy obviously has remained resilient, which is good news here for earnings here going forward.

And then also the fact that, yes, we have seen some volatility within the commodity market. But we haven't seen huge spikes to the upside, right? When you take a look at the price of crude, when you take a look at some of the other movements that we have seen, so with those risks kind of being outlined-- and Lerner talked about this in his note, too.

It points to the fact that, yes, to going back to what you were saying, this momentum to the upside here or reasons to be positive on the market going forward, those calls still remain intact.

JOSH SCHAFER: Oh, definitely. Right. And we're going to get a lot more information on that over the next couple of weeks, too I think. And I think that will help sort of maybe drive a more clear picture for the rest of the year. Right now, consensus expects earnings in Q4 to increase year-over-year by 17%. That's a big number, like that's a really big number we're talking about there.

And if you want to argue that since that's been consensus for a little bit now, it's priced in to some extent, as it comes down, how does the market react? What do we hear about guidance, I think, for the rest of the year? Out of this quarter is going to be a big deal.

Right now, one stat, I was looking at this morning, guys. This was over from Evercore, which just stocks are seeing a much larger negative reaction if they miss on EPS and sales in the next day than they normally do. Only about a little over 50 S&P 500 companies have reported in Q1. This is per Julian Emanuel. But he saw a 10% decline in stocks that miss on EPS and revenue in the next day.

That is more than double what you normally see. So perhaps in a market, some argue priced for perfection, right, and with really good earnings. If you're not living up to those expectations, or maybe if you're JP Morgan, even raising those expectations to where people want them to be, you don't quite see the stock reaction, right?

And again, keep in mind, a stock like JP Morgan had rallied over 40% in earnings, right? So maybe it didn't need to go up any higher. But I thought that was a little interesting tidbit when you look at a big company like that that has done very well this year. Not raising it to the level that people want, I think, will be something to watch, maybe perhaps especially into tech earnings.

SEANA SMITH: Yeah, yeah, exactly.

JOSH SCHAFER: Expectations are pretty high there.

SEANA SMITH: Yeah, and that's great to point out, right, because just meeting expectations clearly not good enough for the market, especially when you take a look at the current valuation levels, like you were just saying, and specifically in some of those names that have really outperformed the broader market by a wide margin.

JOSH SCHAFER: We're still very close to all-time highs, like that's something to keep in mind. Yes, we've pulled back a little bit, but we're still pretty close to as high as we've ever been. You're going to need a real reason to keep moving higher.

SEANA SMITH: Yeah, makes sense. All right, Josh. Thanks so much.