A) The financial markets have recently experienced significant turbulence, but much of this volatility stems from shifts in sentiment rather than a collapse of underlying economic fundamentals.

The market was long overdue for a pullback, as excessive valuations had built up across major indexes, particularly in speculative sectors. Momentum stocks, especially in the tech sector, were trading at sky-high multiples, making them particularly vulnerable.

This overvaluation created a fragile environment where any negative trigger could spark a sell-off. Trump’s harsh and ill-advised trade policies provided that spark. What might have been a modest pullback escalated into a full-blown correction.

B) One of the most alarming signals cited by pessimists is the Atlanta Fed’s GDPNow model, which recently plummeted from a projected growth rate of 2.3% to a contraction of -2.4%. This drop has fuelled fears of a recession. Nonetheless, the headline number hides a more complex reality.

The sharp contraction was driven primarily by a massive trade deficit at the start of the year, which subtracted roughly 3.5% from GDP. This deficit wasn’t a sign of economic weakness but rather a strategic move by U.S. businesses, which ramped up imports to stockpile goods ahead of anticipated tariffs. This front-running distorted the GDP figures, creating an exaggerated picture of decline.

Furthermore, the recent jobs report outperformed expectations, adding approximately 0.6% to the GDPNow estimate and narrowing the contraction to around -1.8%. When excluding volatile factors like gold imports, a more realistic Q1 2025 GDP estimate suggests positive growth of around 0-1%.

This suggests the economy is slowing but is nowhere near a recession, and I don’t foresee a bear market or recession on the horizon.

High-yield credit spreads—in my opinion, one of the most reliable indicators of economic stress—have not widened significantly. Historically, a sharp increase in these spreads signals distress in the corporate sector and often precedes a recession. Their current stability suggests that businesses remain financially sound.

When bear markets occur without an accompanying recession, they tend to be less severe and recover quickly. Prior to the non-recessionary bear market in 2022, four of the previous five saw S&P 500 declines of about 20% but lasted an average of just three months. This pattern holds because, absent a recession, the economy’s underlying strength—driven by consumer spending, corporate earnings, and investment—provides a foundation for a swift rebound.

C) Many analysts argue that tariffs will trigger a recession by eroding consumers’ real income growth, tightening spending, and fueling inflation that prevents the Fed from easing monetary policy. While these concerns have merit, I believe they’re overstated.

The Trump administration’s trade policies have undoubtedly dented consumer, business, and investor confidence. Tariffs raise costs, spark uncertainty, and disrupt supply chains. However, this damage has not persisted long enough to derail the economic expansion. There’s still time for policy adjustments—such as scaling back tariffs or negotiating trade deals—to mitigate the fallout.

While tariffs may be inflationary by nature, other aspects of the administration’s agenda are deflationary. Deregulation reduces business costs, and potential cuts in government spending could lead to lower prices.

Jerome Powell has noted that tariffs might cause a one-off price hike but emphasised that “longer-term inflation expectations remain stable and consistent with our 2% target.” The Fed is unlikely to overreact to temporary spikes, focusing instead on persistent trends. This was re-emphasized in the Fed press conference yesterday.

Also, recent CPI and PPI reports point to disinflation, bolstering the case for rate cuts. If current rent prices were fully reflected in CPI calculations (rather than averaging all rents), inflation would already hit the Fed’s 2% target. This lag in shelter cost data obscures the disinflationary trend.

Other factors reinforce this outlook. Crude oil prices have fallen 15% since Trump took office, and mortgage rates are also notably lower than in late 2024. Overall, these deflationary forces could offset tariff-driven price hikes, keeping inflation manageable and giving the Fed room to act.

Again, I believe the disinflationary narrative is still well intact, and if inflation data continues to cool, I anticipate that a few rate cuts will be pulled forward to 2025.

D) Additionally, a key benefit of this correction is the opportunity for market broadening and a reduction in the concentration of the 'Mag 7' stocks within the overall indexes. While the 'Mag 7' significantly contributed to driving the indexes higher in 2023 and 2024, they have now become a major factor weighing down the indexes and contributing substantially to the market decline. In fact, despite the market's significant decline, market breadth indicators have actually remained constant, as much of the downturn has been driven by these large-cap stocks. In short, their high concentration was unsustainable. This reset is healthy, reduces concentration, and sets the stage for a more inclusive rally in the next leg up.

E) Another key point I want to highlight is Trump's overall economic growth strategy, which I believe explains part of the recent market volatility. Understanding this strategy is essential for grasping his policies and the underlying reasons behind shifts in various economic factors, both now and in the years to come.

The underlying goal that Trump is trying to implement is shifting the contribution to GDP growth from government spending to more sustainable components—specifically, increasing the percentage of private investment and consumption while decreasing the share of government spending. Over the past few years, especially under the Biden administration, an increasing portion of economic growth has been driven by government spending. Trump aims to reverse this trend and shift towards making consumption and private domestic investment a consistently increasing percentage contribution to economic growth, while reducing the role of government spending.

Transitioning to this agenda will likely create near-term volatility as fiscal support falls and the private sector adjusts, but it lays the foundation for robust, self-sustaining growth. This is why Trump has repeatedly stated that he anticipates short-term volatility, but believes the trade-off will be more substantial long-term economic growth. Additionally, with trillions of dollars in private investment backlogs, particularly in AI, exponential growth across various sectors in the U.S. is expected. This will make economic growth very promising in the coming decade, which I anticipate will play out, especially as innovation and private domestic investment become more material.

F) Finally, based on my technical analysis, I believe we have just completed the fourth pullback wave on the S&P 500, with the $5,500–$5,600 area serving as the interim bottom for the market. We are now entering the final fifth bullish wave, which could extend to $6,347.23, $6,867.94, or $7,710.52. My most likely short to medium-term target for the SPX this year is in the $6,750–$6,870 range.

Technically, I expect this recovery to be sharp and swift. Despite the significant market decline over the past several weeks, market breadth has actually remained constant. When such divergence occurs, recoveries tend to be quick.

That said, if the market reaches $6,800 in 2025, I anticipate 2026 to be a challenging year for equities. 

In summary, I expect a swift recovery in 2025 from the current lows to around $6,800 on the SPX, followed by a corrective period of poor equity performance in 2026.

However, I view the potential correction in 2026 as a major buying opportunity. Looking ahead over the long term, the outlook for the U.S. market remains highly promising. My projections for the SPX over the next 5 to 7 years, by 2030–2032, are $7,650, $10,200, or potentially even higher.

Current pre-market activity shows significant declines across the market due to concerns over the new tariffs implemented by President Trump. This situation closely resembles last week when the markets dropped sharply on Monday due to DeepSeek, only to be aggressively bought back up, pushing markets back to all-time high levels.

The same pattern is unfolding now, with panic selling in early pre-market trading. However, I expect the market to recover quickly, just like last week. The inflationary impacts of the tariffs are exaggerated. Tariffs themselves are not the immediate cause of inflation; rather, the key issue is how the situation unfolds—how market participants interpret the effects of the tariffs and the subsequent response from monetary policy. The real economic impact stems from monetary policy adjustments based on these perceived changes.

As I’ve mentioned several times in my market commentaries, I believe inflation concerns are overstated. Now, we are seeing the same scenario play out again, as Fed members and economists will likely revise their inflation projections upward due to these newly implemented tariffs. Initially, the markets will react negatively, as we are seeing in pre-market trading today. However, once the market realizes that the inflation implications are exaggerated and actual inflation data surprises to the downside, it will serve as a major catalyst for a rebound. I expect these inflation fears to subside and be forgotten fairly quickly.

The same people selling today will likely be the ones panic-buying a week from now. In reality, earnings matter more, and this week's earnings data should be the primary focus. So far, earnings season has been very promising.

It’s also important to remember that the market is only 2.5% away from all-time highs. This is just short-term noise, yet again. The market's reaction is overly exaggerated, and this pullback should be seen as an opportunity. As I mentioned last week, the end of this pullback will likely mark the beginning of the first bull wave of 2025.

Current pre-market activity shows significant declines across the market, particularly in the tech sector. Nvidia is down 11% in pre-market trading, while the Nasdaq is down 4%, among others.

This decline is driven by concerns regarding the new AI models from DeepSeek.

DeepSeek has reportedly developed a model with capabilities similar to OpenAI's ChatGPT models, but with a 20x to 40x cost reduction. They achieved this using fewer than 2,000 GPUs vs tens of thousands usually required. The concern is that if GPT-level models can be trained with significantly fewer GPUs, it could put immense pressure on Nvidia’s 80–90% profit margins. Additionally, it’s crucial to monitor whether major hyperscalers will increase or decrease their AI CapEx once they realize how much cheaper AI model training can become. This has the potential to create notable headwinds for Nvidia and other chipmakers.

However, I think this pre-market selloff is highly overblown. Here's why:

• Cheaper training means increased utilization. Lower costs will allow larger and more frequent training of AI models, fueling the AI race with greater efficiency than ever before.

• Lower cost barriers will spark growth in new AI applications. This, in turn, will drive greater overall hardware demand.

• In other words, increased efficiency in resource use will lead to greater resource consumption in the long term. This dynamic will result in higher demand for GPUs and related hardware over time.

Despite the NASDAQ being down -4% pre-market, I believe this selloff presents a prime buying opportunity. This dip is likely the final pullback before the first bullish wave of 2025 begins.

In my view, the market’s reaction is overly exaggerated, and this pullback should be seen as a chance to capitalize on a significant opportunity.

I believe the long-term outlook for the U.S. markets over the next five years is exceptionally strong. Many people have yet to grasp the immense potential of AI and the transformative impact it will have. The exponential boost in productivity it offers will soon drive a significant and accelerating impact on earnings. AI in 2024, is like Bitcoin in 2013.

Based on my daily technical analysis of the S&P 500, my short-term view is that we are at the beginning of a minor market correction, with a potential decline of approximately 5% to 7%. It may last for a few weeks, extending into January 2025. 

I don't think we will have an end of year Santa rally, which has often been the case in the past few years. We got the Santa rally already in October and November. Usually, based on historical seasonality, October is a weak month, and the last few weeks of December are strong. This was reversed this year. October was surprisingly a strong month and the end to December seems to be weak.

Nonetheless, this will present an excellent buying opportunity for the year ahead.

I think the biggest threat for 2025 is the reacceleration of inflation. This is one of the major reasons for the recent sell-off in the markets especially after the Fed meeting a couple of weeks ago. It was very concerning to see that there was a huge increase in the uncertainty of inflation. All Fed participants mentioned uncertainty surrounding inflation.

The PCE estimates for 2025 were also revised upwards by the Fed, the main reason for the recent market weakness. However, I think the main reason for the increase in PCE 2025 estimates was on the basis of adding an inflation premium of possible Trump policies, including tariffs, more spending, etc. However, I don't believe it too much, and I don't believe Trump will cause a meaningful reacceleration in inflation. So I think the market reaction is overextended, and if true, do expect inflation data to come in below estimates in the next few months, which will remove uncertainty, and will be very bullish for the markets.

Do expect any inflation data that will be relreased in January showing that the disinflation story is still alive and strong, resulting in repricing of rate cuts for the year, to be the major catalyst for the next bull move upwards in the markets.

So nonetheless, if inflation doesn't show any signs of any meaningful reaccelerating, then 2025 should be another very positive year. Although like I mentioned, I do expect a small correction leading into January 2025, but this dip should be bought.

I think the main opportunity for 2025 is a) technology and b) small caps. a) Despite tech being the dominant sector for the last few years, I still think they will outperform the other sectors by a significant margin. We are at the very beginning of the AI revolution. b) There are many small cap names that will breakout big time in 2025, especially once the inflation uncertainty goes away. So I also do expect the Russell 2000 to perform well.

Regardless, the longer-term trend is very bright for the US markets. My prediction is the S&P 500 will reach 10,200 (+70% increase from current level) in the next 5-7 years. This conclusion is based on the technical and fundamental analysis that I conduct and review daily.

As the first quarter draws to a close, I'd like to share my initial thoughts on the year so far. Q1 ended strong, with the S&P 500, NASDAQ, and DOW rising by 10.79%, 10.93%, and 5.55%, respectively.

Historically, when the markets show such strength early in the year, they tend to sustain their momentum throughout. In the past 75 years, there have been 16 instances of double-digit returns in the first quarter. Only once did the S&P 500 fail to return positive returns for the following three quarters. On the remaining 15 occasions, the average return was a positive 9.7%, with a resulting average annual return of 20% for the year.

A significant factor this quarter has been the continued revision of fewer interest rate cuts. The markets entered the year with six interest rate cuts priced in. However, economic data continues to be strong, showing no sign of any weakness. Moreover, the last three inflation reports have exceeded expectations, with inflation showing signs of re-acceleration and persistence. These factors have led the markets to significantly delay any potential rate cuts.

It's worth noting that in the Fed's latest meeting, Jerome Powell mentioned that the Fed plans to cut rates three times this year, despite revising their PCE higher. This marked a notably dovish stance and indicated Powell's comfort with inflation remaining elevated and the notion that it will take longer for it to decrease.

In the latest CPI report, both March CPI and March Core CPI surpassed expectations. March CPI MoM came in at 0.4% vs 0.3% expected, with a YoY increase of 3.5% vs 3.4% expected. Similarly, March Core CPI was 0.4% vs 0.3% expected, with a YoY rise of 3.8% vs 3.7% expected. As a result, interest rate expectations were revised to only 2-3 cuts, a huge shift from the initial expectations of six cuts at the beginning of the year.

Therefore, with the huge shift in interest rate expectations, why has the market continued to rally? This has been a continuous argument made by bears throughout the year, stating that once the overly optimistic rate cuts are scaled back, markets will correct. However, this has not occurred. There are several reasons that could explain this.

GDP forecasts are consistently being revised upward, unemployment remains at record lows, consumer strength and health are robust, and savings are at great levels. Furthermore, earnings are accelerating, with a majority of companies beating Q4 2023 earnings expectations and increasing their FY24 guidance.

This is what is important at the end of the day: regardless of whether there will be six, three, or no rate cuts, what it comes down to is earnings, and earnings are accelerating. This is why I think it’s more important to focus on earnings rather than interest rate expectations. Interest rates will eventually be cut; it’s just a matter of time. It’s merely short-term noise. In the long term, what really matters is earnings. As an investor, I would much rather prefer that the economy remains strong with elevated interest rates than see the economy and consumer begin to slow down, leading to rate cuts.

It is also important to mention that the market is not in an “everything-rally” mood, and stocks that missed earnings expectations or even slightly revised their guidance lower were punished severely. So, the markets are rewarding and punishing stocks accordingly and are not in an overly exuberant mood. Moreover, the markets, if removing the tech sector, is not overvalued by any means; and small-cap stocks are even trading at historically low multiples. So, the markets in most areas are definitely not overvalued.

The other major reason for the rally this year is the over $6 trillion of cash sitting on the sidelines. Last year, many people missed out on a very strong double-digit year for the markets. That's why, this year, with a shift in sentiment and hopes of a soft landing, there is a significant amount of dry powder waiting to be deployed in the markets. Consequently, if you've been observing, you may have noticed that every dip in the market has been met with very aggressive buying so far this year. Almost every time the market experiences a couple of red days, there is an immediate strong rally the following day.

Nonetheless, as for the remainder of the year, we will have to monitor whether inflation is gradually falling, how Q1 earnings unfold, and whether the economy and consumer remain strong. If the consumer and economy can sustain its strength, inflation slowly falls, earnings gradually accelerate, and rates are cut around twice to three times this year, I believe we could see another strong double-digit year for the markets.

The regional banking instability began in early March with the collapse of Silicon Valley Bank followed by the failure of Signature Bank. Initially, this seemed like the culmination of the crisis. However, the situation escalated further last week as First Republic Bank collapsed and was subsequently acquired by JP Morgan. Numerous banks, such as Pacwest and Western Alliance Bank are also confronting immense pressure, with the SPDR S&P Regional Banking ETF down approximately 35% year to date.

Essentially, what transpired was a classic case of asset-liability mismatch, a risk that can arise when interest rates surge. When individuals deposit money into a bank it is classified as a liability on the bank's balance sheet as they do not own those funds. Banks also offer a minimal amount of interest on deposits below 1%. Nonetheless, banks are only required to retain a small percentage as cash reserves for withdrawal demands, while the remaining funds classified as assets are utilized for activities such as issuing loans or investing in fixed income like long-term treasury bonds to generate returns. However higher rates have caused consequences on both the asset and liability sides.

Firstly, higher rates have made alternative investments, such as money markets and short-term treasury bonds, more appealing, offering nearly 5% interest. Consequently, numerous individuals are withdrawing their deposits to allocate them to these more attractive investment options. This exerts pressure on banks to raise the interest rates they offer on deposits, thereby contracting their interest rate spread and profitability. I find this situation somewhat ironic since, while the Federal Reserve aims to stabilize the banking turmoil and reduce inflation by raising rates, the higher rates are inadvertently prompting individuals to withdraw their deposits in favor of more enticing investments, contributing to added pressure on these banks.

Additionally, with higher interest rates, long-term treasury portfolios, which SVB had almost 60% of its deposits placed in, have experienced a sharp decline in value. This is because when yields rise prices fall. The same effect can be observed in banks' loan portfolios as the value of their existing loans has also diminished because higher interest rates mean that the interest received from new loans are considerably higher compared to their original loans.

Consequently, these factors have caused a huge mismatch between assets and liabilities on banks' balance sheets and has contributed to a contraction in their profits. As a result, many depositors have lost confidence in the banks and requested withdrawals. However, since banks only maintain a small reserve of cash, they are forced to sell their loan and bond portfolios at significant losses to meet those demands. This creates a substantial hole in their balance sheets, leading to a bank run and ultimately the failure of the bank.

While Jerome Powell recently asserted that the banking sector is "sound and resilient" it remains uncertain whether more banks will fail in the near future. Those who argue that the banking sector is secure and that no further collapses will occur attribute the failures to independent factors and the mismanagement of individual banks, particularly their poor risk management practices that failed to safeguard against higher interest rates. However, I criticize those who solely blame the bank management since no one foresaw these events unfolding, including the Federal Reserve, which did not even incorporate interest rate risks into their stress tests. It is easy to identify the causes and assign blame after it occurred which is a common characteristic of a black swan event. This is when an unexpected situation occurs, catching everyone off guard, but seems glaringly obvious in hindsight.

Interestingly, the current banking crisis has already surpassed the 2008 financial crisis in terms of assets involved. Currently, we are witnessing $548 billion of assets associated with three bank failures, whereas in 2008, there were twenty-five bank failures amounting to $373 billion. However, the current crisis is nowhere near comparable to the magnitude of the 2008 financial crisis. The 2008 crisis was systemic and interconnected, fueled by complex financial instruments such as CDOs, synthetic CDOs, and CDS, which triggered a global financial meltdown. Additionally, over $2 trillion dollars were completely wiped out during the 2008 crisis.

The ramifications of the present banking crisis can pose a threat to the banking industry going forward. As smaller regional banks continue to collapse and more individuals deposit their funds into larger banks, there is a trend towards greater concentration of wealth and power in a few major institutions. This concentration creates a concern because when only the big banks dominate the market this will propel the concept of "too big to fail".

The S&P 500 and NASDAQ ended the week up 0.69% and 0.32%, respectively, with several economic data points indicating a slowing economy. The CPI report came in at 5.00% YoY below the 5.2% consensus, and increased by 0.1% MoM. In addition, initial jobless claims came in at 239,000 above the estimated 232,000, showing some signs of a cooling labor market.

Nonetheless, this week has reiterated the idea of an uncertain future with different indicators communicating a different path ahead. First we have the bond market as inverted as ever pointing to a recession, and rising 2 yr treasury yields anticipating interest rate increases. Then we have a Fed that is stating that they won’t cut rates this year because of sticky inflation and a ‘mild recession’ is looming near. Finally, we have a stock market that is still rallying and pricing in two/three rate cuts by the end of the year as if completely ignoring what the Fed is forecasting, mainly due to the CPI coming in much lower than expected.

However, even though CPI came in much lower than expected at 5.00% YoY we have to understand that the way the CPI data is displayed is that whenever a new YoY CPI is released it disregards the past month of the previous year. So for example this CPI release accounts for the YoY from March 2022 - March 2023 and disregards February 2022 from the calculation. So whenever a new YoY is released the past month of last year is taken out of the equation. While this is understandably the norm of calculating the CPI, because last year the economy experienced high increases in inflation, with February 2022 rising 0.8%, the YoY figure that is now released can make inflation look much better than in reality.

Secondly, Core CPI still came in at 5.6% higher than the 5.0% CPI. This is different from usual times since most often Core CPI is lower than CPI as it excludes food and energy. However, since the Core CPI came in higher than the CPI, this indicates that stickier components in the economy such as service and shelter inflation still remain high.

In addition, the theme of cheering bad economic data which has helped the stock market rally may soon fade away. The two main components which held this theme that I think have worked in conjunction with one another and boosted the rally, is decreasing inflation and a strong labor market with a 3.6% unemployment rate (much lower than expected by now). This is because with cooling inflation, yet maintaining a strong labor market, it signifies to the market a soft landing. However, this theme could go away because the labor market, which with the current data has shown to remain strong, may deteriorate. Unemployment and labor data is by far the most lagging economic data point. Therefore, the current data, since backward looking, does not portray an accurate view of the current labor market.

Finally, substantial liquidity will be soon drained from the markets. Firstly, this week the federal government will receive its tax payments which will boost its Treasury General Account (the U.S. government's operating account), thus meaning it can reduce its reserve balances which will remove liquidity from the markets. The current reserve balances are around $3.3 Trillion, and if based on last year, an increase in the treasury general account of the same magnitude from the tax receipts of 2022, will cause around 4.00$ Trillion to be reduced from reserve balances, again removing liquidity from the markets. Moreover, with a calming in the banking sector, the Fed's banking crisis facility has been declining, and further credit tightening will occur mostly from regional banks.

With the NASDAQ and S&P 500 rallying over 18% and 7% year to date, respectively, 2023 has proven to be an exciting year for the markets so far. In my opinion the reason for the recent positivity in the markets are twofold.

Firstly, inflation, even though stubbornly high, is slowly declining. Moreover, although the labor market is still tight, several labor data points, such as slowing wage growth, increasing initial jobless claims, and decreasing job openings, indicate worsening economic conditions, which is essentially seen as a positive by the markets as it signals the Fed to stop hiking rates. 

This idea for cheering worse economic data has been a common theme throughout this year. 

The second reason for the recent positivity in the markets is ironically, the banking crisis. The banking crisis, which began with SVB, was a Black Swan event that no one, not even regulators were able to anticipate. Although at first, this created a great amount of volatility in the markets, this provided the Fed a signal to stop hiking rates as much as they anticipated. When the Fed hiked rates as swiftly as they have, the risks were unknown, but with the banking crisis, the risk has been uncovered.

Therefore, shortly following the crisis, Fed Fund Futures which before the banking crisis indicated that the Fed would hike to around 5.75-6.00% dropped to 4.75-5.00%. The markets took that positively and even began to price in rate cuts by the end of this year which was the catalyst for the markets to rally with the NASDAQ entering a bull market last week. 

Nonetheless, the current market is slightly too optimistic. The markets took the banking crisis as an excuse to rally significantly, and began pricing in rate cuts by the end of the year. Nonetheless, as economic data is still strong, inflation still stubbornly high, and the banking crisis settled for now, the Fed has reiterated that they will still hike rates in May, most likely 25 basis points, and not cut rates by the end of the year. 

Thus, once the markets reprice the rate cuts and realize they will be higher for longer, we will see a pullback in the markets. Furthermore, markets are up, but yields are down with investors running towards treasuries. This is not illustrative of a true bull market.