Market Rally Stalls – What Now?

A team of strategists at Ned Davis Research has been analyzing market trends, and their findings suggest U.S. stocks are pausing for breath after two blockbuster years—much to investors’ frustration.

For the past two and a half months, the S&P 500 (SPX) has been stuck in a tight trading range, signaling a period of “consolidation,” according to the Ned Davis team. Despite this, the index has still managed to reach new record highs, most recently on Wednesday, per FactSet data. However, the pace of gains has slowed considerably compared to 2024, while European and Chinese stocks have surged ahead.

Given ongoing concerns over tariffs, widespread federal layoffs, and high stock valuations, the market’s resilience has been notable.

“So far, markets have largely brushed off the tariff threats and [President Donald] Trump’s geopolitical drama this year,” said Burns McKinney, portfolio manager at NFJ Investments, in an email to MarketWatch on Thursday.

Still, investor sentiment is beginning to show signs of strain. Vanguard’s investor confidence metrics recently saw their steepest drop since 2022, according to Andy Reed, head of investor-behavior research at the firm. He noted that concerns over record-high egg prices are overshadowing enthusiasm for the stock market.

However, history suggests that indecisive trading periods like this often resolve quickly—typically followed by stronger gains. The Ned Davis team analyzed the S&P 500’s performance since early December, comparing it to past episodes of sideways trading. While historical patterns show some variability, they suggest that choppy trading could persist in the short term before stocks resume their upward momentum.

“Whether the past 2.5 months mark a consolidation phase within an ongoing bull market or the start of a downturn depends on factors like inflation and earnings,” said Ed Clissold, chief U.S. strategist at Ned Davis, in a report shared with MarketWatch. “Right now, the data still supports the bull market case—until proven otherwise.”

Investors’ concerns were evident in Thursday’s market action, as disappointing earnings guidance from Walmart Inc. (WMT) rattled confidence in consumer strength. The S&P 500, Nasdaq Composite (COMP), and Dow Jones Industrial Average (DJIA) all ended the day lower.