After a slow start out of the gate, stocks are finally starting to make some technical progress this month. Call it a Trump bump or another buy-the-dip-inspired rebound, but the S&P 500 is trading less than 1% away from a record high, as of January 22. A close above 6,090.27 would check the box for a new high and end the 29-trading day dry spell without one, a relatively high count considering the index made a new high every 4.4 trading days in 2024.
There are plenty of catalysts underpinning the recent advance. President Trump brings a pro-growth agenda to Washington, along with expectations of reduced regulations and the prospect of lower taxes. Several major bank CEOs have recently highlighted the elevated enthusiasm for the new administration among their corporate clients. On last week’s earnings call, JPMorgan Chase’s CEO Jamie Dimon noted, “Businesses are more optimistic about the economy, and they are encouraged by expectations for a more pro-growth agenda and improved collaboration between government and business.”
Many of these major banks also reported fourth-quarter earnings that handily exceeded forecasts, adding another tailwind to the latest rebound. Outside of improving net interest margins and a jump in investment banking activity and trading revenue, there were also positive takeaways at the consumer level as credit and debit card sales notably picked up last quarter for several of the big banks.
At the macro level, a cooler-than-expected core Consumer Price Index (CPI) report last week helped assuage inflation fears and keep rate-cut expectations on the table. This translated into a sharp pullback in interest rates, including a notable 0.13% drop in 10-year Treasury yields. And while the pullback was encouraging, it was not enough to reverse the developing uptrend in yields. Technically, a move below support near 4.45% would be a good sign of the cycle high being reached earlier this month.
With the stock market nearing record-high levels, it might seem premature to talk about a potential correction—characterized by a market drawdown of 10% or more but less than 20%. However, bull markets are not linear, and corrections, though relatively improbable, are always possible. According to our friends at Ned Davis Research, a correction has occurred every 1.1 years going back to 1928. Furthermore, the last time the market entered an official correction was 309 trading days ago, spanning well beyond the average number of 173 trading days without a correction since 1928.
Corrections Are Probably More Common Than You Think
While a correction may be unexpected, drawdowns in the market are the norm. In fact, the S&P 500 has been in some form a drawdown 93% of the time since 1950 (in other words, 7% of all trading days have been at record highs). As highlighted below, drawdowns of less than 5% from a record high are the most common, occurring in roughly 37% of all trading days. Pullbacks that exceed 5% but not 10% occur about 15% of the time, while bear market drawdowns of at least 20% represent roughly 21% of all trading days.
S&P 500 Drawdown State (1950–YTD)
Summary
President Trump’s pro-growth agenda, a reprieve from rising rates and solid earnings thus far have recently renewed investor optimism. Momentum has turned bullish as the broader market approaches record-high territory. However, market breadth measures have not kept up with the recent rebound in stocks, implying the latest advance has been relatively narrow. While deviations between price and market breadth can persist for extended periods, they can often foreshadow building vulnerabilities of a rally susceptible to stalling. While we are not making a call for an imminent correction, investors should not be surprised if one develops this year as history shows they occur at least once per year.
LPL Research expects stocks to move modestly higher in 2025, while acknowledging reasonable upside and downside scenarios. Upside support could come from economic growth, a supportive Fed, strong corporate profits and business-friendly policies from the Trump administration. The most likely downside scenarios involve re-accelerating inflation, higher interest rates and geopolitical threats that do economic harm.
Adam Turnquist is chief technical strategist at LPL Financial.