The Stock Market Has Bounced Back Nicely. Here's Why This Investment Manager Believes Lows Will Be Retested

The recent rally in the stock market has been impressive. Over the past four sessions, the S&P 500 has climbed 7.1%, fueled by easing concerns around tariffs and the Federal Reserve’s autonomy. This momentum has set off a series of positive technical indicators, lifting the spirits of long-term market optimists. For instance, Tom Lee of Fundstrat expressed confidence, stating that the odds now favor a V-shaped recovery in equities.

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However, not all market watchers share this optimism. Dan Niles, the founder of Niles Investment Management, voiced a much more cautious view in a lengthy post on X late Sunday. He outlined several reasons why he believes stocks are likely to retest their recent lows — if not fall even further.

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One of the primary concerns Niles highlighted is the broader policy environment. He questions whether the S&P 500 — which is now down just 6% for the year and only 3% lower than where it stood prior to Trump’s “Liberation Day” announcement — accurately reflects the growing political turmoil, the rising risk of a recession, and potential disruptions in currency and credit markets. If it doesn’t, Niles argues, the bulk of the easy gains from this 11% rally since April 8th’s low may already have been captured.

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Niles also turned to history for perspective, offering a sobering reminder about the psychology of bear markets. During the Global Financial Crisis, the S&P 500 experienced 11 rallies that averaged 10% each — none lasting more than two months — before ultimately plummeting 57% over 18 months. Similarly, during the bursting of the tech bubble, there were seven rallies averaging 14% across five-month spans amid a broader 49% decline that stretched over two and a half years.

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“The temptation to believe that a market bottom had been found was strong during each of those rallies," Niles said. "But ultimately, earnings expectations and price-to-earnings multiples had to come down, dragging stocks lower in the process.”

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Niles believes that finding a true market bottom this time will also take longer, unless there is an unexpected boost from fiscal stimulus or a significant loosening of monetary policy. Currently, neither seems likely. The government remains focused on spending cuts, while the Federal Reserve, concerned about tariff-driven inflationary pressures, is staying cautious even with unemployment still low.

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U.S.-China trade tensions remain a critical wildcard for the markets. With both nations even unable to agree on whether meaningful negotiations are happening, the prospect of a near-term resolution appears bleak.

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Niles also pointed out that companies are rushing to move goods ahead of potential new tariffs. For example, Apple reportedly airlifted 600 tons of iPhones from India to the U.S. in anticipation of Trump’s latest tariff threats.

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This kind of activity, according to Niles, creates an artificial bump in current demand, masking deeper economic vulnerabilities. He warns that this demand surge could lead to a downturn in the third quarter’s GDP growth and pressure S&P 500 earnings expectations downward.

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In light of this setup, Niles views current Wall Street forecasts of more than 10% earnings growth for the S&P 500 in 2025 as overly optimistic. Instead, he believes earnings-per-share growth could be flat at best — or turn negative if a recession hits. His base case, he notes, is for negative GDP growth in the third quarter driven by the demand pull-forward, followed by a recovery later.

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Valuation is another concern. Niles argues that the market’s current valuation multiples are too high for the current environment. At 23 times trailing earnings, the S&P 500’s valuation should probably be closer to 19 times, considering today’s inflation backdrop. In the event of a recession, he says, multiples typically fall to the mid-teens.

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“All these factors suggest that at a minimum, stock prices will likely retest their recent lows,” Niles concludes.

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On another note, Niles also shared his views on the upcoming earnings reports from the remaining "Magnificent Seven" stocks. Meta Platforms, Microsoft, Amazon, and Apple are set to report in the coming days, with Nvidia following later.

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He highlighted key concerns for each: questions about Meta’s ability to monetize AI, Microsoft’s performance in its Azure cloud business, Amazon’s retail margins under the cloud of tariff uncertainty, Apple’s core business struggles despite its lofty valuation, and Nvidia’s long-term outlook despite its current momentum.

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Meanwhile, U.S. stock futures were slightly lower in Monday's early trading. Benchmark 10-year Treasury yields edged higher, while the U.S. dollar index firmed. Oil prices declined, and gold hovered around $3,290 per ounce.

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