Stocks (^DJI, ^IXIC, ^GSPC) are trading mixed after June's consumer sentiment data hit its lowest level since November, raising concerns about market dynamics. CFRA Research chief investment strategist Sam Stovall joins Market Domination to discuss market outlooks and recession fears.

Stovall is concerned that markets may have "to endure another decline" before the end of the year. He notes that in the first quarter, markets experienced one of the best performances since World War II. Historically, years with such strong starts have seen a significant downturn of 5% or more, with an average decline of 12.5%. However, Stovall highlights a silver lining: historically, the following year sees substantial market gains.

Though with much of the recent market gains driven by the tech sector, Stovall worries, "How long can this jumbo jet fly on only one engine?"

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Angel Smith

Video Transcript

I mean, it's always good to have you on the show.

So as Julie was pointing out, maybe we're taking a, a bit of a pause here, Sam.

Of course, we've got a, a strong run.

What do you make of this market, Sam?

Just where we are and where you think we're headed?

Hey, Josh, good to talk to you again.

Um Yeah, I think at least in the near term we're probably headed a little bit higher.

Uh But I am getting increasingly concerned that we uh have to endure another decline of 5% or more before the year is out.

Uh I point to history for making that statement.

This was the uh the 11th best first quarter return since World War two.

Uh And of the top 1514 of them had declines of 5% or more.

And then if that decline was actually less than 10% we had a repeat.

Uh And the average decline was about 12.5%.

The good news, the silver lining is that each one of these 15 years posted full year gains with the average being above 20%.

So that seems to bode Well, Sam, but in the meantime, when you talk about the possibility of that pullback, what are your main contenders for?

What could trigger it?

Well, I, I guess the, the real problem is that, uh, the market tends to get tripped up by unanticipated events and unanticipated events are hard to anticipate.

But I would tend to say that if we end up just moving too quickly right now, the S and P 500 is trading one standard deviation above uh the average difference between its 200 day moving average and the index itself.

So I just feel that if we get too far above, we're time to have some sort of resetting of the dials digestion.

If we start to see other economic indicators, that point to an economic slowdown that causes investors to worry that maybe we are headed for a recession rather than simply a soft landing.

Let's face it.

Today's consumer confidence was something that was not anticipated.

Uh But at the same time, I still feel that these kind of resetting of the dial are healthy for the market also, Sam, you know, so you, you're talking some technicals there also interested though Sam just to get your take on valuation here for the market at these levels.

How's it looking?

Uh looking pretty pricey?

The S and P 500 is trading at a 30% premium to its 20 year average.

Pe uh we're also looking at tech that's trading at about a uh multiple of 30 which is looking sort of like a very firm ceiling uh for that group.

Uh also trading at a hefty premium to its uh longer term relative pe those groups that are actually attractively valued from a relative pe discount perspective, not surprisingly mid caps, small caps energy stocks uh as well as utilities.

Um And let's talk about the other side of that coin, right?

And big uh big cap tech as I talked about earlier, they continue to be dominating returns here.

Uh When you look at the major averages, accounting for a lot of the gains we've been seeing.

Where do we go from here on that front?

I mean, these guys are still setting records.

Oh, they sure are.

Uh technology was the best performing group on a year to date basis also, just in the past week, technology was up almost 6% while the S and P was up less than uh 2%.

Uh And technology was the only outperforming sector.

So I guess another worry could be uh how long can this Jumbo Jet fly on?

Only one engine?

Uh But my, my feeling is that um historically in election years, when you do have the uh top three performing sectors midway through that year, they tend on average to be out performers for the second half as well.

And Sam just one other sector I wanna kind of dig deeper with you on is utilities uh because we said we've had some, some smart tragedies come on the show and really pound the table on that when saying, you know, it's a smart way for investors to kind of play offense and defense at the same time, but you're actually underweight that sector.

How come Sam?

Well, because what we look at is not just the momentum of the group but also uh the percentage of stocks in the category that have buy and strong buy recommendations.

Uh And our analysts basically are pointing to the fact that only three of the uh 31 companies in the S and P 500 utilities sector index are really A I related and are posting above average returns, take out those stocks and the sector would be under performing.

Uh So I think you do have to be fairly selective.

Yes, there will be increased power needs for uh the data centers, et cetera.

Um But I think you have to be very selective as to what stocks to go for Sam.

One of the things that we've noticed as of late um among some of the law cap tech, but just more broadly, our, our new stock splits being announced and I don't think the numbers necessarily absolute on an absolute basis are going up, but we've got a lot of high profile companies, you know, we had uh NVIDIA, we had Broadcom announcing them.

Does that say anything about the sort of general vibe of the market at all.

I think it does.

I think it indicates that uh company management is feeling more optimistic about the future.

And so they are willing in a sense to make their share prices more accessible uh to a greater number of investors, institutional investors focus more on the dollar value.

Uh But retail investors uh look to the price of the underlying stock.

Uh Remember, you know, I go back a long way.

Uh and it used to be that a stock wanted to have uh split if it got between 40 $80 a share to make it more appealing and affordable for investors.

Because back in the sixties, seventies, et cetera, uh uh prior to commission free trading, it was a lot less expensive to buy a round lot or multiple of 100 than it was an odd lot.

Uh Also now today, however, with commission free trading with uh the shares, uh basically, it's not much of a concern but it is more of a psychological tailwind for that company.

Sam shifting gears a bit here.

I'm, I'm also interested to get your take on politics and just sort of the kind of political uncertainty we're now seeing really kinda on both side, the Atlantic Sam, you know, of course, in Europe, um you saw what happened there, things to be seem to be on the move, maybe a real shift to the right there.

Of course, here we have the election coming up.

How is a market strategist, Sam?

Are you trying to think through all that?

Well, that's a good point.

I mean, we do have our Washington analysis arm, uh, which monitors all of the, uh, the bills going through Congress but also monitors uh, the polls to see which candidates are ahead.

Uh And right now the, uh, the thought is that if the election were today, Trump would be the Victor and the US would too also be shifting more toward the right.

What it reminds me of our years, like 68 9, like 1980 like 1948 when you actually had third party candidates involved.

Uh, and, you know, basically, uh, with Robert Kennedy Junior now in the race along with Trump Biden where they are split evenly right now.

Um I, in many ways, it's anyone's guess historically, it used to be that, uh, the markets return from July 31 through October 31 was a very good indicator.

An upward move pointed to a re-election, a downward move pointed to a replacement.

Um, but with asterisks, usually the third parties can be disruptors.

That is really interesting.

Sam, we will keep an eye on that return with the asterisk in mind.

Good to see you.

Thanks so much and have a great weekend.

Thanks.

You too.