Markets dislike uncertainty, and with no shortage of it in Q1 the technical backdrop for equity markets is showing evidence that the cycle that began in Q4 2022 is prematurely peaking. The technical commentary below outlines expectations for markets moving through Q2 into the second half of 2025.
From a technical analysis perspective, the monthly momentum indicators we use to track three-to-four-year market cycles began to turn negative early in Q1 as tariff uncertainty added to investor concerns that the broader economic backdrop was weakening. The momentum downturn is illustrated by the red line in the top panel of the chart below, with the 2009–2025 uptrend for the S&P 500 highlighted in green in the lower panel.
S&P 500 monthly price with cycle momentum
The chart shows the S&P 500 monthly price index, four-year moving average, and momentum indicator from 2007 through March 25, 2025. Momentum began to turn negative in Q1 2025.
Source - RBC Wealth Management, Bloomberg, Optuma
Note that in Q4 2022, when the economic backdrop remained uncertain, the red monthly momentum indicator was at the lower end of its range and was considered oversold technically just as the S&P 500 began to bottom near its rising four-year moving average, signaling a cycle low was developing.
But now, after the S&P 500 has rallied 80% from its 2022 low, the monthly momentum indicator has turned negative. We view this as a yellow flag, possibly indicating that the two-year bull market is at risk of peaking prematurely.
What now?
We see two paths U.S. equity markets might follow moving through Q2 and the rest of 2025. Our expected outcome is that after a 10% decline by the S&P 500 and a 14% decline by the Nasdaq 100, tactical indicators are likely to become sufficiently oversold for a bottom to develop for many stocks heading into April and May, when companies deliver their quarterly earnings reports. Investor sentiment surveys, which we view as contrarian indicators, support a rally scenario in Q2 as the elevated optimism that had taken hold in Q4 following the U.S. election has transitioned to high levels of pessimism. Put differently, with investor expectations materially lowered following the Q1 correction, stocks are better positioned technically for positive reactions to earnings reports. In addition, history supports a scenario in which the S&P 500 rallies in Q2, given the first quarter of new U.S. administrations has often been weak but followed by a second-quarter rebound.
We expect zig-zag movements as a volatile trading range develops moving into earnings season. Looking at the daily chart of the S&P 500 (below) for near-term guidance, we can see that the Q1 correction pushed short-term indicators (top panel) into oversold territory suitable to support a bounce. There are two resistance levels the S&P 500 will have to contend with on the current bounce. The first resistance is the red 200-day moving average where the index stalled on Wednesday near 5,756, and the second key level is at the blue 50-day moving average near 5,900. Given that short-term indicators are still building positively, we expect further near-term upside into early April before they peak at overbought levels, which would likely lead to another pullback in mid-to-late April. We would expect an April pullback to hold above the recent lows near 5,500, setting the stage for a Q2 rebound. Despite the recent volatility, market breadth as measured by the S&P 500’s Advance-Decline line (shown in the bottom panel of the chart), remains impressively resilient given it has consolidated in a narrow band through Q1. If a much broader market correction was developing, we would expect to see this A-D line deteriorate and decline to a lower low, but that has not been the case. Our interpretation of this indicator is that investors have reduced their exposure to some areas of the market, notably high-valuation growth stocks and some cyclicals, but are rotating capital to other, less economically sensitive sectors with more defensive qualities.
S&P 500 daily price with momentum and advance-decline line
The chart shows the S&P 500 daily price index, momentum indicator, and advance-decline line from July 2024 through March 25, 2025. The chart highlights the Q1 2025 market correction.
Source - RBC Wealth Management, Bloomberg, Optuma
While our expectation is for a Q2 rebound as outlined above, we cannot ignore the risk that a more bearish path could develop, particularly if the current tariff uncertainty is prolonged into Q2 or beyond. A break below the March lows by the S&P 500 and Nasdaq 100 would be a signal that the Q1 correction is extending into a more protracted decline, and we would view a breakdown by the A-D line to a lower low as a confirming signal. For investors with tactical flexibility, we would recommend managing downside risk near the March lows. A break below those lows would open a risk window for a test of the longer-term uptrend coinciding with the rising four-year moving average between 4,700 and 4,800.
Portfolio implications
In our view, this analysis implies investors should consider raising the quality of equities held in portfolios with a focus on conservative, income-generating dividend stocks. The silver lining is that a tactical rally appears likely moving into Q2, coinciding with earnings season, which we view as an opportunity for investors to rebalance portfolio exposure.