A stock market riding a heater of historic intensity into last week didn’t need to look far to find a few tidy excuses to cool off.
Perched atop a 23% ramp from the tariff tantrum low in early April and sitting just 3% below its all-time peak from three months earlier, the S&P 500 was handed a Moody’s downgrade of U.S. government debt, a fevered Treasury-market sell-off stoking overwrought talk of fiscal breaking points and the re-emergence of punitive presidential tariff threats against the two transnational economic blocs, the EU and Apple.
A week ago here, after running through the credibility earned for the rebound rally through broad participation and the clearing of several technical hurdles, I noted that “pullbacks to relieve the tape’s current overbought condition should be both expected and well-contained.”
We’ve now got the to-be-expected 3%-ish pullback. Is it likely to remain well-contained?
Based on what one can see and surmise, probably so, as long as “well-contained” is defined broadly enough to allow for some more churn and air pockets, with the chance for a few more percent of downside leakage in the indexes.
Bespoke Investment Group clocked the prior 15 times the S&P 500 has rallied from a 15%-or-greater decline to within 3% of the former peak and found, “History shows that once we get this close to fully recovering big drops like we saw from February through April, new highs are ultimately not far off.” To be specific, the ensuing weeks were a coin toss, but by six months later, the index was up every time, on average by almost 10%.
When such reassuring historical tendencies are aired, skeptics are quick to offer reasons why present circumstances are more hazardous or uncertain than past episodes. This impulse is stronger than ever right now, when the degree of policy flux – much of it dialed up or down by the president alone – feels unique.
Fair enough, though by definition a quick 15%-plus drop in the stock market is usually a response to some destabilizing and often novel shock. And, for sure, there are a couple of past instances of such a comeback rally ultimately failing beyond the six-month window. One was the lead-up to the Global Financial Crisis, the other the 2019 recovery which eventually gave way to the Covid Crash.
Source: https://www.cnbc.com/2025/05/26/stock-markets-intense-comeback-from-the-tariff-tantrum-low-hits-a-setback.html