Market Outlook: After Rally, Be Prepared for More Pullbacks

This week's stock rally doesn't mean the market's recent pullback is over, money managers say. Instead, investors should be prepared more volatility--and more declines--in the coming weeks.

"There's no such thing as a free lunch," Rafael Resendes, co-founder of the Applied Finance Group, told CNBC. "If you want the higher returns that come with equity over time, you have to be willing to take those swings."

Stocks rallied sharply on Wednesday after the Federal Reserve signaled that it was no longer leaning toward raising interest rates. The gains pushed both the Nasdaq and S&P 500 back into positive territory for the year, prompting hopes that the February selloff was finally over.

But many market pros think that investors may have gotten ahead of themselves.

"The people that rushed to judgment that this opened the door for a Fed cut may be a bit premature," said Sandy Lincoln, chief market strategist for Wayne Hummer Asset Management. "I'm not sure the data in terms of economic performance really yet supports that claim, so we would be a little bit more cautious."

Volatility a Factor

Volatility has been a factor in the markets in the last month. A selloff on Feb. 27 shaved more than 3% from the major U.S. stock indexes. This past week, the Dow traded higher for five straight sessions. However, analysts were reluctant to pronounce the pullback dead.

"I think it's too early to declare victory," Craig Columbus, chief market strategist at Advanced Equities Asset Management, told "We're up against some pretty good resistance. We need to mark time for a while before I would say we're done, but the fact that we've been able to hold on to these gains is healthy."

"This is continued volatility," said Linda Duessel, equity market strategist at Federated Investors. "We go from hot to cold. It really was good news that we got Wednesday, but we still think there's a correction we need to endure."

After the Fed's comments this past week, traders are expected to pay particularly close attention to economic data for signs of a slowdown in the economy. This coming week, Wall Street will get new home sales, durable goods and Gross Domestic Product data.

Analysts say corporate earnings will also be a major factor in the markets in the coming days.

"Right now I think the market has gone from worrying about the Fed, which is what we saw Wednesday," said Wood. "As that fear moves away, we're worrying about earnings, which is precisely what market analysts and portfolio managers ought to be doing."

"You're going to see people rotate and gravitate their thinking to what's going to happen in the first quarter in terms of profits," said Lincoln. "What are we going to see in terms of topline performance, which I think will be very telling for the first quarter."

Unforeseen geopolitical concerns have also resurfaced as potential market drivers. On Friday, Britain's Ministry of Defense said 15 British sailors were seized by Iran off of the coast of Iraq. Crude oil futures climbed over $62 a barrel to close at their highest level in two weeks.

"I think everyone's going to be watching to see how this plays out with Iran and the U.K.," said Eric Bolling, an independent oil trader and part of CNBC's Fast Money team. "There's a lot of geopolitics going on. I think the equity markets as well as the energy markets are going to keep an eye out and see how this plays out."

Good Investment Story

Even if there's more downside in the market's near future, some analysts say long-term investors can still find good opportunities.

Merrill Lynch's latest monthly survey of fund managers released this past week noted that cash balances held by portfolio managers have risen to 4.4% in March, up from 3.8% in February. However, the survey also said that a net 25% of asset allocators are planning to raise their equity exposure over the next three months.

"When you look at the U.S. market, you see great assets, trading to give you a long-term rate of return of 9% compared to the mid-four's for Treasuries," said Resendes. "We think there's a really good story to be told here yet."

"We've been telling our clients to look at what does well in a Fed-induced economic slowdown," said Stephen Wood, portfolio strategist at the Russell Investment Group. "We recommend larger cap companies with quality earnings. You want strong balance sheets and strong cash flow that can withstand this economic slowdown and protect margins."

"We still see decent value in some of the financials," Charles Lieberman, chief investment officer at Advisors Capital Management, told "I certainly agree that many mortgage lenders are going to experience difficulty, but I think it's a leap too far to extrapolate that to the banks and investment banking firms."

Lieberman likes money center banks such as Bank of America , Citigroupand JP Morgan Chase. Advisors Capital Management owns all of those stocks in its portfolio.

Andrew Seibert, senior portfolio manager at Stewart Capital, also likes the larger banks, as well as pharmaceuticals. "In this kind of environment, you want a company that can pay a dividend," said Seibert. "Johnson & Johnson and Abbott Laboratories pay nice dividends and they have solid potential for growth." Stewart Capital owns both stocks in its portfolio.

"One of our favorite sectors is technology," said Duessel. "We think that the capital expenditures for tech look good and valuations look pretty good to us."

"Everyone seems to want to be in a defensive sector or a cyclical theme, but the focus shouldn't be by sector," Jeff Krumpelman, senior portfolio manager at Fifth Third Asset Management told "We're focusing on companies that have been able to consistently grow earnings and pay out dividends.

Krumpelman's recommendations include Microchip Technology , a semiconductor stock that he says pays a 3% dividend. He also likes Franklin Resources among asset managers, as well as medical supplies manufacturer Stryker Corporation. His megacap picks include Coca-Cola and McDonald's. Fifth Third Asset Management owns all of Krumpelman's recommendations in its portfolios.