A 'deeper' S&P 500 pullback is coming, Piper Sandler warns

Piper Sandler analysts are cautioning investors about a potential correction in the S&P 500, despite recent highs. Their note highlights a weakening market that could lead to a significant pullback.

In today's note warning of a potential correction, Piper Sandler stated: "Deteriorating market breadth and narrowing leadership" are the key concerns.

This means that fewer stocks are participating in the rally, and investors are focusing on a limited group of high-performing companies. They argue that this undermines the sustainability of the current upswing.

However, it goes against a separate note from the firm this week that said its analysts believe Wall Street will remain bullish until unemployment reaches 4.5% and they remain constructive. Even so, they flagged that most market downturns occur from either higher rates or unemployment.

Nevertheless, Piper Sandler said its technical indicators also point towards a correction. Piper Sandler's "40-week Technique indicator" shows a low number of stocks trending positively, suggesting weaker market internals.

While the recent jobs report might lead to a Fed rate cut, Piper Sandler says other factors are concerning.

"The MID and RTY are below their 50-day MAs and poised for a leg lower toward their respective 200-day MAs," the firm states, indicating a potential decline in mid-cap and small-cap stocks.

Despite maintaining its year-end target, Piper Sandler expects a "deeper pullback/correction in the coming months." They believe the S&P 500 is overdue for a 10% correction towards its long-term uptrend. In conclusion, Piper Sandler advises investors to be cautious. The current market dynamics suggest a correction is likely, and investors should prioritize vigilance over complacency.