The markets have made a remarkable recovery from their “Liberation Day” induced sell-off in early April, with the S&P 500 Index up +28.3%, S&P/ASX 200 Index up +16.6% and MSCI All Country World Index (AUD) up +17.3% from their April lows (at the time of writing). If we look across the global equity complex, apart from India’s top 50 index and S&P small caps index in the U.S., all the equity markets we follow are delivering positive returns year-to-date in 2025.
This is after a stellar 2024, which saw double digit returns across most markets. Further, valuation metrics across global markets are elevated because of the recent market rally.
Is a correction around the corner?
Naturally, due to the strong equity markets rally investors are constantly asking this question. Surely, the markets cannot continue to climb. Firstly, elevated valuations alone are not going to drive a market correction, you will likely need a catalyst (like a recession) for markets to experience an aggressive sell off. Below we discuss a select number of technical indicators to determine if a correction is imminent.
Seasonal factors.
In our view, global equity markets – especially the S&P 500 Index – are highly susceptible to a correction of approx. 5-7% in the coming months. Yes, part of our reasoning for this forecast is that the strong rally from April lows is due for a healthy pull back. But part of it is seasonal factors.
Therefore, the much-needed pullback in equity markets investors are looking for may be the result of seasonality factors playing out rather than any material changes in underlying fundamentals. We think the correction could be a little more than historical averages because of the strong market rally from April lows. All else being equal and subject to no new data point which could change our view on the fundamentals, we would likely see it as a buying opportunity to go up the quality curve.
Positioning is not extreme…yet. According to Deutsche Bank strategists, while asset managers positioning appears to be bullish it is not at extreme level and aggregate exposure is only modestly overweight. Given market positioning is not at extreme levels and, to date, S&P 500 quarterly earnings updates are coming in ahead of expectations, this indicator isn’t screaming sell signals yet.
Stocks 52-week high data is still subdued.
We agree what we have presented here isn’t exhaustive and that on several metrics the S&P 500 Index & other equity markets do appear to be overbought. However, another metric that remains subdued is the ratio of number of S&P 500 stocks making 52-week highs versus number of stocks making 52-week lows. This ratio is still nowhere near the December 2024 levels in terms of the number of stocks making fresh 52-week highs in the current rally. Similarly, the number of stocks closing above their 200-day moving average on the New York Stock Exchange (NYSE) is also not at stretched levels.
