Stress remains in the market. The medium/longer-term prospects of the bull market likely benefit from a further correction in terms of depth or duration. As of writing, the S&P 500 hasn't yet fallen 10% from its previous all-time high (1/3/2022).

A lot of companies have guided downward this earnings season. The expectations treadmill is getting reset to a lower speed. As McKinsey says, "the higher the market's expectations for a company, the better a company has to perform just to keep up."

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An earnings slowdown is a given. An earnings "recession" (different from an economic recession) is possible with the demand pull-forward caused by Covid and the increased potential for significant demand forecasting errors (e.g., Peloton). Supply chain delays are likely to exacerbate mismatches between forecasted demand and actual demand. Growth is decelerating and a mid- cycle slowdown along with earnings moderation seems highly likely. However, the last all-time high in the S&P 500 (on Jan 3rd) looks inconsistent with past major market tops across several frameworks. This year might be like 2011, 2015, or 2018, i.e., flattish with downside volatility along the way.

I've gotten some questions on Jeremey Grantham's recent Bloomberg interview, in which he calls the present market situation a "superbubble" like that of the late 1920s. I think the market might end up in that situation in the years ahead, but we're not there yet. Purely from a market performance standpoint, comparisons to the late 20s, or even late 90s, are still premature. Also, margin debt build-up was a known driver of the roaring 20s bull market-and so far in the 2020s, margin debt build-up has been unremarkable. In fact, margin debt has been falling relative to the market recently. In other words, the market is de-levering.

Furthermore, from Dec 2020 to last week's close, the S&P 500 forward multiple fell from 27.0 to 19.5, a 28% decline (the market is up 16% in that same period of time by the way). And valuations are now back to 2017 levels. In December 2017, the forward P/E ratio was 20. It's currently 19.5. That means that since the end of 2017, the market's rise (+63%) has been entirely driven by earnings growth, not by multiple expansion.

There's still a lot of focus on Fed tightening. As a reminder, the market can rise with quantitative tightening and with positive and rising real interest rates. The Fed Funds Rate is currently expected to peak between 2.00-2.25% late next year. And I wouldn't be surprised if the Fed makes a dovish pivot later this year. Covid cases are falling rapidly, restrictions are being lifted, fiscal stimulus is fading-the supply side of the economy should meaningfully strengthen in the quarters ahead.

In general, the current S&P 500 drawdown looks consistent with a healthy correction in an ongoing bull market. The market was overdue for one. Medium-term, a review of the data suggests the market outlook continues to be supported by the ongoing economic expansion (at least for now), a remaining wall-of-worry to climb, and near-term market pessimism.