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Buy The Dip! Pullbacks And Corrections Are Common. Every Bull Market Has Them. It's An Opportunity In Disguise
Stocks were off to a heady start this year.
But recent tariff fears, inflation worries, and sudden concerns over GDP growth have dragged stocks lower.
But I’m here to say it’s an opportunity in disguise.
Most pullbacks/corrections are.
For one, the market was due for a pullback/correction anyway. And the aforementioned worries presented the perfect catalyst (or excuse -- whatever you want to call it) for investors to pull some profits.
For context, pullbacks are defined as a decline between -5% and -9.99%, and they happen on average of 3-4 times and year. Corrections are defined as a decline between -10% and -19.99%, and they happen on average of about once a year.
The Dow is down -9.33% from their all-time high close last December (pullback). The S&P 500 is down -10.1% from their all-time high close just a few weeks ago (correction). The Nasdaq is down -14.2% from their all-time high close last December (correction). The small-cap Russell 2000 is down -18.4% from their high close last November (correction), and the mid-cap S&P 400 is down -15.7% from their all-time high close from November (correction).
As painful as pullbacks and corrections are, they are very common. Every bull market has them.
But if you know these are commonplace moves, you can instead look at them as opportunities to buy rather than places to sell.
You should also know that pullbacks and corrections are often accompanied by great hysteria. And it feels like we’re getting to that stage right now (if we haven’t already).
But again, pauses like this help refresh and strengthen the market before their next leg up.
And when this one is done (it may be closer than you think), I’m expecting a huge move up.
Here are some reasons why 2025 could be shaping up to be a historic bull market.
History Repeats Itself
Last year saw the S&P 500 soar by 23.3%.
That was the second year in a row of 20%+ gains. (2023 was up 24.2%.)
That’s a feat rarely seen in the past.
And I believe that bodes well not only for this year, but for several years to come.
Although, some see the impressive back-to-back gains as a cautionary tale and tie it to the dot-com bubble.
But I see it differently.
The dot-com bubble ‘burst’ in 2000 was when the S&P dropped by -10.1% for the year. (That was also Y2K, which caused plenty of panic leading up to it, but came and went pretty much without a hiccup.)
The point is, the dot-com bubble was preceded by the dot-com (technology) boom.
In 1995 the S&P was up 34.1%.
In 1996 it was up 20.3%.
That was the first time it was up 20% or more for two years in a row since 1954-55.
So, what happened in 1997? It was up another 31.0%.
1998? Up another 26.7%.
And in 1999, it was up 19.5%.
A spectacular rally that lasted 5 long, glorious years.
Yes, the dot-com bubble arrived in 2000. But not before people got rich over the preceding 5 years with a 220% increase in the index, while plenty of individual stocks were up several hundred percent to several thousand percent.
And I’m here to say that I believe we could possibly see the same thing again now. Maybe 5 years or more of boom times – for similar reasons, and some unique to the present day.
Tech Booms: Past And Present (AI Tech Boom Is Alive And Well)
The tech boom back then saw everybody go nuts for technology stocks, driven by the internet and dot-com companies.
It was new and exciting. And the internet was forecast to change the way people shopped, did business, and interacted with each other.
The promise was real, as we now know.
So, what’s the parallel?
In part, it’s another tech boom.
But this modern technology boom is being driven by Artificial Intelligence (AI).
And it’s forecast to be just as transformative as the personal computer, the internet and the mobile phone. And it’s expected to touch virtually every industry in some way shape or form, as well as impact ordinary lives.
The AI trade has worked so well for a reason -- because the AI boom is real, and is supported by real earnings, and real growth potential.
But there are plenty of other catalysts that make the market outlook even more exciting.
Continued . . .
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Inflation And Interest Rate
While progress on inflation had slowed at the end of last year, recent inflation reports show that the path back down to the Fed’s 2% target has resumed.
Last week’s Consumer Price Index (CPI, retail inflation) showed core inflation (ex-food & energy) at 3.1% y/y, down from last month’s 3.3%.
The Producer Price Index (PPI, wholesale inflation) came in at 3.4% y/y, down from last month’s 3.6%.
And the previous week’s Personal Consumption Expenditures (PCE) index (the Fed’s preferred inflation indicator), was at 2.6% y/y, down from last month’s 2.8%.
While everyone agrees that inflation is still too high, Fed Chair Jerome Powell, recently said that he believes inflation is on a “sustainable path back to 2%.”
He also said that he was “feeling good” about the economy and that they’ve made “significant progress on inflation,” while maintaining a “strong, but not overheated” jobs market.
While the Fed is not ready to cut interest rates again just yet, citing uncertainty around tariffs, the Fed is still forecasting 2 more rate cuts this year (presumably by 25 basis points each).
And that comes on the heels of the 100 basis points they cut last year (all within 4 short months).
The lower interest rates are likely to help businesses of all sizes, but they should have a bigger impact on smaller-cap companies as they typically carry higher debt, and at less favorable terms. And the savings will help increase their bottom lines.
Market Transition And Breadth Expansion
I expect large-caps and tech/AI names to continue to thrive for all of the reasons described above.
But I expect some of those profits to find their way into other industries and stocks as lower interest rates make them look more attractive. That should lift the small-cap index and the mid-cap index. And should allow for a big game of catch-up for those ignored categories.
But it should also continue to lift the Dow, the Nasdaq and the S&P 500, as other stocks in those indexes will get a chance to benefit more broadly as investor dollars start giving those more attention.
And that’s very bullish for the market.
Plus, as interest rates continue to fall, you can be sure plenty of money tied up in money markets will find their way back into equities, further supporting stock prices.
What Going On With Q1’25 GDP Estimates?
A few weeks ago, the market was suddenly spooked by the Federal Reserve Bank of Atlanta’s GDPNow estimate for Q1’25 GDP. Previously pegged at a positive growth rate of 2.3%, it was slashed to -1.5%, and then a few days later it was slashed again to -2.8%.
Currently it’s at -2.4%. But the dramatic downshift from positive to negative caught many off guard.
But I should mention that there are seasonal factors that can weigh on Q1’s GDP. In fact, Q1 is considered the weakest quarter of the year.
We also have the potential skewing of a rush of imports that came in, in an effort to beat the new tariffs. (It should be noted that an increase in imports vs. exports can depress GDP numbers.)
That being said, the huge swing from a gain of +2.3% to a decline of -2.4% is worth noting. And shouldn’t be summarily dismissed. But there are factors exacerbating this. And investors should keep that in mind.
With that, you are going to hear the word recession more and more in the coming weeks and months.
Even President Trump, last weekend, hinted we could see one before the economy adjusts to the new policies. Although, he has since said he doesn’t expect a recession, saying “I don’t see it at all. I think this country is going to boom.”
Commerce Secretary, Howard Lutnick weighed in and said there will “absolutely not” be a recession.
What’s important to note is that the underlying economy is strong. And that was underscored, once again, by the latest Employment Situation report. It wasn’t gangbusters. But another 151,000 new jobs is not recessionary. It’s indicative of growth.
And it echoes Mr. Powell’s sentiments, as mentioned earlier, of a “strong, but not overheated” labor market.
The Earnings Outlook Is For Growth
Ironically, while everyone frets over tariffs and the drop in Q1 GDP estimates, the earnings picture looks excellent.
Q4’24 S&P earnings (with more than 98% of earnings already in) is on pace to show a 15.0% increase.
Q1’25 is forecast at 6.1%.
Q2 is forecast at 10.5%.
Q3 is forecast at 9.9%.
And Q4 is forecast at 10.9%.
So, while recession fears have suddenly become a concern, none of that is showing up in the aggregate earnings estimates.
And earnings are the key driver of stock prices.
Then couple that with the recent fall in stock prices, and the valuations now look like bargains.
Do What Works
So how do you fully take advantage of the market right now?
By implementing tried and true methods that work to find the best stocks.
For example, did you know that stocks with a Zacks Rank #1 Strong Buy have beaten the market in 29 of the last 37 years (a 78% win ratio) with an average annual return of more than 24% per year? That's more than 2 x the S&P, including 4 bear markets and 4 recessions. And consistently beating the market year after year can add up to a lot more than just two times the returns.
It also killed in 1995 with a 52.6% gain; 1996 with 40.9%; 1997 with 43.9%; 1998 with 19.5%; and 1999 with 45.9%. It was also up in 2000 by 14.3% while the S&P was down.
Did you also know that stocks in the top 50% of Zacks Ranked Industries outperform those in the bottom 50% by a factor of 2 to 1? There's a reason why they say that half of a stock's price movement can be attributed to the group that it's in. Because it's true!
Those two things will give any investor a huge probability of success and put you well on your way to beating the market.
But you’re not there yet, as those two items alone will only narrow down a field of 10,000 stocks to the top 100 or so. Way too many to trade at once.
So, the next step is to get that list down to the best 5-10 stocks that you can buy.
Proven Profitable Strategies
Picking the best stocks is a lot easier when there’s a proven, profitable method to do it.
And by concentrating on what has proven to work in the past, you’ll have a better idea as to what your probability of success will be now and in the future.
Of course, this won't preclude you from ever having another losing trade. But if your stock picking strategy picks winners more often than losers, you can feel confident that your next trade will have a high probability of success.
Here are a few of my favorite strategies that have regularly crushed the market year after year.
New Highs: Studies have shown that stocks making new highs have a tendency of making even higher highs. And this strategy proves it. The alignment of positive price action and strong fundamentals creates all the necessary conditions to see these stocks soar to even greater heights. Over the last 25 years (2000 through 2024), using a 1-week rebalance, the average annual return has been 37.6% vs. the S&P’s 7.7%, which is 4.9 x the market.
Small-Cap Growth: Small-caps have historically outperformed the market time and time again. Often these are newer companies in the early part of their growth cycle, which is when they grow the fastest. This strategy combines the aggressive growth of small-caps with our special blend of growth and valuation metrics for explosive returns. Over the last 25 years (2000 through 2024), using a 1-week rebalance, the average annual return has been 44.3%, beating the market by 5.8 x the returns.
Filtered Zacks Rank 5: This strategy leverages the Zacks Rank #1 Strong Buys, and adds two time-tested filters to narrow the list of stocks down to five high probability picks each week. Over the last 25 years (2000 through 2024), using a 1-week rebalance, the average annual return has been 48.4%, which is 6.3 x the market.
The best part about these strategies (aside from the returns) is that all of the testing and hard work has already been done. There’s no guesswork involved. Just point and click and start getting into better stocks on your very next trade.
Where To Start
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You'll quickly see how to get the most out of the proven system that has more than doubled the market for over three decades. Discover what kind of trader you are, how to find stocks with the highest probability of success, and how to trade them so you can consistently beat the market no matter where stock prices are headed.
You’ll get the formulas behind our top-performing strategies suited for a variety of different trading styles.
The best of these strategies produced gains up to +307.1% in 2024 while the S&P 500 gained +27.4%.¹
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Thanks and good trading,
Kevin
Zacks Executive VP Kevin Matras is responsible for all of our trading and investing services. He developed many of our most powerful market-beating strategies and directs the Zacks Method for Trading: Home Study Course.
¹ The individual strategies mentioned herein represent only a portion of the ones covered in the course.
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This article originally published on Zacks Investment Research (zacks.com).
