After two consecutive losing weeks for US equity markets (^DJI, ^IXIC, ^GSPC), was a pullback inevitable after a strong first-quarter start to 2024?

Charles Schwab Senior Investment Strategist Kevin Gordon joins the Morning Brief in-studio to talk about which parts of the market are pricing in Federal Reserve interest rate cuts the hardest, as well as which sectors have been playing a game of catch-up heading into this trading year.

"When we came into '24, even with the strength that you had seen across an array of sectors in October, November, and then December to finish out the year, you had a lot of catching up to do for a considerable chunk of the market," Gordon tells Yahoo Finance. "When we came into '24, about half of the S&P 500 was still trading lower than where it was in January of 2022 and a lot of that was concentrated in deeper cyclicals like energy and financials and industrials and even materials. So, I think that there's still a lot of catching up to do there..."

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

This post was written by Luke Carberry Mogan.

Video Transcript

- To break this down for us we've got Kevin Gordon, Charles Schwab senior investment strategist, here with us. Kevin, just walk us through the thesis here on a larger pullback and what you're expecting here.

KEVIN GORDON: Well, I think it's really because we've gone through now a pretty extended period of time with sentiment running really hot. This really started back in mid November when you had major indexes, and most stocks actually in each index really rebounding strongly off of that October 27 low, and then you shot quickly into extreme optimism territory. Across an array of sentiment indicators, we track both on the attitudinal and the behavioral side. So whenever you get in that territory, you are vulnerable.

But you need a negative catalyst to push you in that direction. We would argue probably at this point it's related to yields. But it's also related to what's going on in terms of maybe a repricing of Fed policy. So when you think about oversold statistics like the number of stocks that are above a certain moving day average, whether it's the 50-day, whether it's the 200-day, you can go down the list and see that we haven't yet probably gotten to that full rinsing phase.

So maybe we push a little bit lower to wring out all of that sentiment. But I still think the upside is that you're in an uptrend still so you're in a stronger position when you were entering this correction, if you want to call it that right now. It's still a little shallow. But you were in a stronger position entering into that than you were in prior instances last year.

- So should this still be viewed maybe as a buying opportunity. We talk about the fact that we're seeing a bit of a pressure here across the broader markets at least over the last couple of days. It still maybe is a strong entry point then for investors.

BRAD SMITH: Yeah, I think it depends where. I mean, when we came into 24 even with the strength that you had seen across an array of sectors in October, November, and then December to finish out the year, you had a lot of catching up to do for a considerable chunk of the market. I mean, when we came into 24 about half of the S&P 500 was still trading lower than where it was in January of 2022, and a lot of that was concentrated in deeper cyclicals like energy and financials and industrials and even materials.

So I think that there's still a lot of catching up to do there, especially if the cyclical parts of the economy notwithstanding some of the weakness in this morning's housing data. If you continue to see the roll through of the recovery that we've seen in areas like manufacturing and the goods part of the economy, then yeah, I think there's probably more sustainability to that trend, but not without some choppiness as we've been figuring out over the past week.

- Banks kicking off the earnings season here, what is the theme that you're sensing right now among these major financial institutions that could prevail for the rest of this earnings season.

BRAD SMITH: There's-- I don't cover individual stocks. But just looking at some of the commentary, there's I think enough idiosyncratic pressure but also benefits, I would say. If you look at some of the misses on net interest income as you were talking about with Madison or looking at the provision for credit losses, it looks different in each report. So I would pay more attention to that the overall health of the consumer.

- And it seems like that comes back to a demand theme as well.

BRAD SMITH: Absolutely. Yeah, absolutely a demand theme, especially because labor has been relatively resilient over the past couple of years really since the Fed started hiking. So I think keeping that in mind where even when you move down the wealth or the income spectrum, spending can remain pretty strong because they rely more people-- rely more on their actual month-to-month spending or their month to month income than they do on a pre-existing stock of wealth.