Another Quick Market Comeback

Another Quick Market Comeback: What's Driving the Rebound—and What Still Lies Ahead

After a sharp and unsettling 19% drop from February highs, the S&P 500 has made a swift comeback over the past 30 days. This rebound, though welcome, is unfolding against a complex economic backdrop marked by mixed signals and unresolved risks. In this article, we examine the drivers behind the rally, highlight ongoing warning signs, and outline key considerations for investors as the market adjusts to the evolving economic landscape

Decent Earnings Kept the Floor from Falling Out

Despite early fears, corporate America held up better than many anticipated in the first quarter of 2025. The overall takeaway was encouraging for recent earnings reports. Eight of the eleven S&P 500 sectors posted year-over-year earnings growth in Q1. Notably, 75.3% of companies bear analyst expectations - right in line with historical norms.

Analysts now expect Q1 earnings to reflect a 12.5% improvement over the same quarter last year, with revenues up 4.9%. These results exceeded forecasts and provided the kind of stability that markets crave during periods of volatility.

AI Momentum Continues to Impress

The technology sector—and AI in particular—was a critical pillar of support for the market rally. Microsoft delivered one of its strongest quarters ever, while Meta, Amazon, and Alphabet all reaffirmed their aggressive investment plans in AI infrastructure.

The sustained demand for cloud computing capacity signals that the AI buildout is not just hype—it’s translating into real revenue. For investors betting on long-term tech growth, this was a validation point. As AI continues to shape enterprise spending and productivity, it remains a core narrative driving equity markets.

Trade Worries Take a Backseat—for Now

One surprising tailwind was the easing of trade-related anxiety. US and China’s breakthrough to drastically roll back tariffs buoyed markets on Monday morning. While no sweeping agreements have been struck with key partners like Japan, or the EU, markets responded positively to every incremental headline.

Last week’s UK trade agreement helped, but it was the thawing tone with China - along with carve-outs for technology and automotive sectors - that soothed investor nerves. However, the absence of comprehensive trade deals remains a cloud on the horizon.

Lessons From Market History: A Word of Caution

This rapid turnaround in markets has drawn comparisons to the early 2000s, when a post-bubble rally for the S&P 500 gave way to two years of steep losses. That context is a reminder that not every bounce signals a sustained bull run.

While the nature of this correction—largely self-inflicted—meant it could be quickly reversed, we are not out of the woods. Investors should brace for continued volatility, particularly as forward earnings may reflect a slowdown in spending and economic activity through the next couple of quarters.

The Slowing Economy: A Different Kind of Risk

Amid the rally, there are growing signs that the U.S. economy is losing momentum. Last week’s data—soft GDP coupled with surprisingly strong job numbers—suggests an uneven path ahead. While this mix lifted investor optimism in the short term, the deeper story is one of deceleration.

Without decisive fiscal stimulus or progress on the trade front, a recession could be on the horizon. The broader concern is structural: if Washington pursues policies that restrict trade, reduce immigration, and balloon deficits, the recovery could be shallow and short-lived.

Retail and service sectors, already strained by global supply chain friction - particularly with China - could face further headwinds. And a shrinking labor force due to lower immigration would only exacerbate the slowdown.

Conclusion: Have a Process, Not a Prediction

Market timing is hard - we believe impossible. At every inflection point, intelligent, experienced people will offer compelling arguments on both sides. That’s why the key to navigating volatility isn’t to chase headlines or forecasts but to anchor your strategy in a disciplined process. Your time horizon matters more than the latest jobs report or the next GDP print. The only way to escape the conundrum, in our opinion, is to have a process rather than a forecast. Stay grounded in your investment framework and manage risk with discipline.