In the last three years, strong market run-ups in the first quarter have led to pullbacks of between 10 to 20 percent during the first few weeks of the second quarter. And ahead of the second quarter this year, the debate continues over whether equities will see a consolidation.
"It looks like the rally's gotten tired and we're due for a pullback for stocks. And while we may not see the huge pullback like in the past years, a smaller decline of about 5 to 10 percent is what we're expecting," said Jeff Kleintop, chief market strategist for LPL Financial. "But we'll see a bounce after that, so individual investors can use this market to their advantage and look to buy on the dips."
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Some analysts point to slow earnings growth as a possible catalyst for the pullback.
"Absent the unpinning of the market by the continued liquidity coming from the Fed, we are going to be focusing on first-quarter earnings," said Quincy Krosby, market strategist at Prudential Financial. "Worries over the sequester and Europe kept companies from spending—we want to see if they've turned the corner and whether demand is picking up."
Earnings growth expectations for the first quarter are at a modest 1.5 percent, according to the latest data from Thomson Reuters. So far, a little over 100 companies on the S&P 500 have provided negative earnings guidance compared to 23 positive pre-announcements for the first-quarter. Still, earnings growth is forecast at 9.2 percent for the year.
Just last week, industry heavyweights including Oracle, FedEx and Caterpillar handed in cautious outlooks.
"Earnings expectations have not risen as much as in prior years, which may limit the disappointment," wrote Kleintop. "It is too early to say whether [the earnings revision] indicator is flashing a warning sign."
Also keeping investors nervous are negative headlines from Europe. In addition to the jitters over the Cyprus bailout, investors added Italy's economic and political concerns to their list of worries as the nation faced ongoing political deadlock.
"In the short-term, we've had a big move since November and if investors are going to be nervous, Europe's going to be an excuse," said Thomas Lee, chief U.S. equity strategist at JPMorgan. "But at the end of the day, I don't think this is a big enough threat to say the bull market's over and global recession's starting because there's another financial crisis."
Lee has a year-end target of 1,580 on the S&P 500.
"The big picture still points to a major secular bull market being underway, with at least another four years left, led by durable goods," he said.
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