Brace for a stock-market pullback after an epic start to the year, strategist warns

• The S&P 500 is likely to fall at least 5% in the coming months, one strategist predicted.
• CFRA's Sam Stovall said a pullback tends to follow a great first quarter for the benchmark index.

Brace for stocks to take a breather and retreat by at least 5% after a breathless start to the year, one strategist warned.

The S&P 500 surged by more than 10% in the first quarter. AI mania lit a fire under stocks like Nvidia and Microsoft, and cooling inflation stoked investors' hopes for a flurry of interest-rate cuts, fueling demand for stocks.

Sam Stovall, CFRA Research's chief investment strategist, recently that performance was the index's 11th-best first-quarter return since World War II. However, he noted that 14 of the top 15 returns were followed by a decline of 5% or more, and a subsequent slump of more than 12% in some cases.

"I am getting increasingly concerned that we have to endure another decline of 5% or more before the year is out," Stovall said, framing the slump as a "resetting of the dials" or "digestion" after a big meal.

That would slash the S&P from 5,432 points at Friday's close to about 5,160 — the same level as early March. A 12% drop would push the index down below 4,800, where it was trading in January.

Stovall said the "silver lining" is that after a fantastic first quarter, the S&P 500 tends to finish the year up more than 20% on average. That suggests the index could build significantly on its 14% year-to-date gain.

The Wall Street veteran, who worked as S&P Global's chief investment strategist for 27 years before joining CFRA in 2016, also outlined what might trigger a pullback.

He pointed to an unpredictable event such as a war or bank failure, markets rising too quickly and becoming overstretched, or an economic slowdown that reignites recession fears among investors.

Stovall noted the S&P is trading at a 30% premium to its average price-to-earnings multiple over the past 20 years, and flagged its reliance on technology stocks for its recent gains.

"How long can this jumbo jet fly on only one engine?" he asked.