Investing.com — A note from Sevens Research on Tuesday highlighted the importance of distinguishing between market volatility that merely triggers a pullback and events that could end the rally altogether.
Sevens stressed that there is likely to be more turbulence in 2025 due to “unorthodox policies of the new government”, shifts in government bond yields and the US dollar, and ongoing geopolitical and economic uncertainties.
Despite the expected turmoil, Sevens Research remains of the view that the market outlook remains generally positive.
The company categorizes potential sources of volatility and assigns a rating to each source based on its likely market impact. For example, the Trump administration’s rhetoric may unsettle markets, but is largely seen as “more bark than bite.”
Sevens Research believes such headlines are more likely to lead to decline rather than sustained decline because “very little can be done in government without review, scrutiny or challenge.”
Likewise, rising rates and a stronger dollar, while problematic for stock valuations, are unlikely to end the rally unless there is a “disorderly spike” that pushes benchmarks like the benchmarks significantly higher.
Sevens adds that trade threats, another source of volatility, are likely to only escalate into a rally killer if far-reaching tariffs are imposed with material economic consequences.
Conversely, certain factors are seen as a greater threat to market stability. Sevens Research notes that any doubts about economic growth could be a “major problem” as the Fed would struggle to cut rates quickly enough to avoid a slowdown.
Furthermore, if the Fed pauses or reverses its rate-cutting cycle, “the 21x-22x multiple” underlying current valuations would be invalidated, creating a potential rally killer.
The analysts conclude: “Headline-driven volatility will increase and being able to determine which negative headlines are likely to just cause a pullback and which negative news poses a real threat to the rally will be the difference between spotting a potential buying opportunity in an upward trend.” trend market and reducing risk to a potentially decidedly negative event.”
