Stocks experiencing necessary, modest pullback in longer-term bull market.

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The markets have reached a complex stage in the second quarter of 2024, facing what screenwriters would call “second-act problems.” After a smooth first quarter characterized by economic growth and market optimism, recent events such as warmer-than-expected CPI readings have stirred up bond-market volatility, reinvigorated concerns about inflation, and resurfaced worries about the tradeoffs between growth, valuation, and Fed policy. This has resulted in a 1.5% weekly drop in the S&P 500, with geopolitical concerns adding further pressure on risk markets.

Despite the turbulence in the markets, the overarching backdrop remains that of a bull market, with persistent strength and broad-based market rallies indicating that the market is not yet mature or overly generous. The recent pullback, sparked by inflation concerns, is seen as a natural correction within a larger upward trend. While the Federal Reserve’s reconsideration of its stance on interest rates has added uncertainty, the corporate earnings recovery and expected growth continue to support current valuations. Market reactions to earnings reports are expected to be noisy, exposing areas of excess belief among investors and potentially creating buying opportunities for those who remain cautiously optimistic.

As momentum in the markets resets and attitudes shift, investors are reevaluating their expectations and positioning themselves for potential opportunities. The recent market volatility and concerns about inflation highlight the delicate balance that investors must strike between optimistic growth scenarios and realistic expectations. Ultimately, the market is in a phase of testing its own premises and navigating the evolving narrative of economic growth, inflation, and Fed policy in the second act of 2024.

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