Investing.com — The S&P 500’s recent foray into correction territory was unusually quick, but UBS believes the index is likely to make a comeback next month as trade policy uncertainty is expected to ease in the coming weeks.
“Once we receive policy clarity, stocks are likely to recover,” analysts at UBS said, expecting the Trump administration to lift trade policy uncertainty in the coming weeks.
“We believe it would be politically counterproductive for the Trump administration to pursue policies that risk pushing the economy into recession,” analysts at UBS said in a recent note. “We therefore believe that policy will start to clarify in the coming weeks, perhaps shortly after the Trump administration announces its plans for “reciprocal” tariffs on 2 April.”
The S&P 500 officially entered correction territory, defined as a 10% decline from recent highs last week. The correction took just 22 days to unfold, much faster than the average time of 75 days, UBS said.
The recent selloff in U.S. equity markets has been driven by policy uncertainty, largely stemming from tariff uncertainty. The spike in policy uncertainty hit the market at a time when investor positioning and sentiment were quite elevated.
While the speed of the selloff has caught many off guard, history suggests that corrections within bull markets tend to be good buying opportunities.
For investors who buy after stocks have fallen 10%, the average S&P 500 return over the next 3, 6, and 12 months is 8%, 13%, and 19%, respectively.
The recent selloff has hit momentum stocks including high-flying tech stocsk, hard, but that has helped to clear up excess positioning, the analysts said.
“Over the last month, momentum stocks have experienced one of their worst performance periods in the last 20+ years, and investor sentiment surveys are very bearish. When this is the case, forward returns are usually solid,” they added.
The risk-reward skew for stocks “still looks favorable over the next three months,” the analysts said, even if the current correction leads to a bear market, UBS added.
But bear markets aren’t common and only occur every seven years on average, with the last one occurring three years ago.
Related Articles
Bombardier CEO fears US could target firm if Canada scraps jet deal
US stocks rise as investors weigh economic data, Trump policies
