MW Stocks have had a good bounce. But here's why this investment manager thinks lows will be retested.

By Jamie Chisholm

Dan Niles worries that we've just seen a bear market rally and valuations are still too high

It's been quite a bounce. The S&P 500 has risen four sessions in a row for a gain of 7.1% on easing angst about tariffs and Federal Reserve independence.

The strength and breadth of the rally has triggered some positive technical signals. Long-term bulls are chipper, with Fundstrat's Tom Lee saying "probabilities favor a V-shaped recovery in equities."

However, Dan Niles, founder of Niles Investment Management, is much more cautious. In a long post on X late Sunday, he gives reasons why stocks probably retest the recent lows "at the very least."

First, there's the policy backdrop. Niles asks whether an S&P 500 SPX now down just 6% year-to-date and off only 3% from just before Trump's 'Liberation Day' accurately reflects the heightened political chaos, recession probabilities and potential currency/credit market disruptions.

"If not, then the easy money has probably been made on this 11% S&P [500] rally from its closing lows on April 8th," Niles says.

He also argues that history provides a sobering reminder about bear market psychology. For example, during the Global Financial Crisis, the S&P 500 experienced eleven rallies averaging 10% each (typically lasting less than two months), while ultimately losing 57% over a year and a half. The Tech Bubble saw seven rallies averaging 14% over five-month periods amid a 49% overall decline spanning two and a half years.

"The desire to believe it was the bottom was quite high during each of those rallies but earnings estimates and trailing PE [share price to earnings] multiples had to still go lower, which ultimately drove the stocks lower," he says.

Niles reckons that finding the market bottom will normally take more time unless there is fiscal stimulus or easier monetary policy. However, the government is currently prioritizing spending cuts and "the Fed is on hold given their concerns over tariff driven inflation in the pipeline and unemployment still remains low."

U.S.-China trade relations remain a critical market variable. With both sides unable to agree even on whether negotiations are occurring, the prospects for meaningful resolution seem dim. Meanwhile, companies are pulling forward demand to get ahead of potential tariffs - Apple $(AAPL)$ reportedly airlifted 600 tons of iPhones from India to beat Trump tariffs, Niles notes.

This demand acceleration creates artificial near-term strength that could mask underlying weakness, and will lead to negative GDP growth in the third quarter and S&P 500 earnings expectations being revised lower, he suggests.

Given this scenario, the current Wall street estimates for over 10% S&P 500 earnings per share growth for 2025 look optimistic and should instead "be closer to flattish," says Niles. And that's if there's just a growth slowdown. In a recession, EPS growth is likely to go negative. "My base case is negative GDP in Q3 from the current pull-in of demand but then a recovery thereafter," he adds.

All this means the market's current valuation multiple is too high. "The S&P trailing multiple at 23x should probably be closer to 19x at the current inflation levels. In a recession, this PE is usually closer to mid-teens," says Niles.

"The above factors will probably cause a retest of the lows for stock prices at the very least."

Incidentally, Niles also gives his summary of what to watch from the five Magnificent 7 stocks that have yet to report earnings, with Meta $(META)$, Microsoft $(MSFT)$, Amazon.com $(AMZN)$ and Apple (AAPL) coming in the just the next few days, and Nvidia $(NVDA)$ later.

Particular concerns exist around Meta's AI monetization strategy, Microsoft's Azure performance, Amazon's retail margins amid tariff uncertainties, Apple's fundamental issues despite high valuation, and Nvidia's long-term prospects despite near-term optimism, he says.

Markets

U.S. stock-index futures (ES00) (YM00) (NQ00) are slightly lower as benchmark Treasury yields BX:TMUBMUSD10Y rise. The dollar index DXY is up, while oil prices (CL.1) fall and gold (GC00) is trading around $3,290 an ounce.

   Key asset performance                                                Last       5d      1m       YTD      1y 
   S&P 500                                                              5525.21    4.59%   -1.00%   -6.06%   8.34% 
   Nasdaq Composite                                                     17,382.94  6.73%   0.35%    -9.98%   9.14% 
   10-year Treasury                                                     4.269      -14.50  5.90     -30.70   -34.90 
   Gold                                                                 3288.9     -4.26%  4.16%    24.61%   40.10% 
   Oil                                                                  62.91      0.35%   -11.89%  -12.47%  -23.96% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

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The buzz

The Federal Reserve has now entered it's quiet period, with no comments by officials, until the Federal Open Market Committee meeting concludes on May 7.

Slate Auto, backed by Amazon's Jeff Bezos, has unveiled a $20,000 electric truck, a competitor to Elon Musk's Tesla $(TSLA)$.

Domino Pizza's shares $(DPZ)$ are dipping in premarket action after after the pizza chain's first-quarter profit and revenue fell short of Wall Street projections, due partly to a slower economy.

China-based fast-fashion group Shein has increased some U.S. prices by as much as 377% ahead of a tariff increase on small parcels, says Bloomberg.

Elite universities have formed a private collective to resist the Trump administration, according to the Wall Street Journal.

Canada holds its general election on Monday, with the trade battle against the U.S. in focus.

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Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   GME     GameStop 
   PLTR    Palantir Technologies 
   AAPL    Apple 
   AMZN    Amazon.com 
   TSM     Taiwan Semiconductor Manufacturing 
   MSTR    Strategy 
   NIO     NIO 
   META    Meta Platforms 

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-Jamie Chisholm

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April 28, 2025 07:55 ET (11:55 GMT)

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