The Case for Stiff Stock Correction

In my most recent LIVE webinar on Monday, I weighed the pros and cons for the stock market outlook.

Yes, things are still bullish long term...but sense some volatility and potential downside is on the way in the near term.

So today’s commentary will be focused on putting a little more meat on the bones of that conversation. 

Market Commentary

The start to the conversation, is to restate the phrase that continues to pay:

Bull Market til Proven Otherwise

Meaning that when you are in a bull market, then you have to assume that will be the case until PROVEN otherwise.

The main reason is because the US economy has proven to be incredibly resilient over the years. Even recessions in Europe or Asia often don’t end up washing to our shores.

So in order to switch to a bearish narrative and portfolio strategy then you need to prove it “beyond a reasonable doubt”. But if you can’t find that level of proof then you are best served staying bullish.

That is a good starting point for our discussion. But on top of that it is easy to see the other bullish elements at play including:

Growing Economy: GDPNow predicts Q3 US economic growth at +4.6%. That is well above the historical trend of +2.1%.

Corporate Earnings Better than Expected: Earnings were not great in 2025 and yet still stocks pressed ahead (which is hard to do). However, in 2026 we have enjoyed some robust earnings results with growth well above expectations. Better yet was the estimate increases for the future pointing to 12 to 15% expected earnings growth in the quarters ahead. That is well above the long term average of 8% corporate earnings growth.

Valuations are Reasonable: The main area of concern were the AI and Mega Cap names that were getting a bit over-inflated by the end of 2025. Yet in 2026 those stocks have been taken to task for their access valuations. And yet the AI revolution continues on with higher and higher growth estimates for these firms.

So moderating prices + increased earnings outlook = much more reasonable valuations.

You add these 3 items together and its hard to be shaken from the long term bullish outlook which no doubt explains why we recently made new record highs for the S&P 500.

However, at this momentum I see mounting concerns that could affect the short term outlook (inside a long term bull market). If these issues take root, then we “may” devolve into a minor pullback (minus 3 to 5%) or perhaps larger correction (minus 10%).

Here is a breakdown of those negatives:

Inflation Too High: This has been the case since 2022. No...not 9% inflation like we had at the peak because of supply chain issues, but the continual floating between 3-4% annual inflation is too much. The main reason for the current bout of inflation is…

Iran Peace Deal Taking Too Long and Odds of No Deal Are Climbing: The second we started bombing Iran, oil prices spiked which set off this negative chain reaction.

Oil prices spike > inflation fears spike > recession odds spike > stocks drop (about 10% peak to valley).

Yes, the stock price weakness has mostly been unwound starting with a May bounce based upon the news of a peace deal coming together. And yet here we a few months later after many false starts to a peace deal.

No deal in hand...more bombing...Iran holding more negotiating cards than the US in many ways.

That last part needs a little explanation. We have mid term elections coming up and voters are clearly not happy about this war...and especially what it means for prices at the gas pump and overall inflation.

This has Republicans doing very poorly in recent polling leading to greater odds of losing control of the Senate and the House.

It is VERY MUCH in the current administrations interest to forge a peace deal. So why is it not happening? Because clearly Iran feels they can hold the current administrations feet over the fire to get more favorable terms the longer it goes on.

Iranian officials are not worried about elections because they don’t get elected.

Iranian officials are not worried about the perception in the media...because they control the local media.

This is probably the biggest reason why I am getting concerned about the current market picture. And recent market weakness seems to coincide with this item. 

Interest Rates on the Rise: Long term Treasuries keep hitting new highs. Most of the issue is about concerns over inflation staying higher for longer. And some of it is about creeping long term concerns over the growing Government deficit.

If lower rates is the grease that lubricates and speeds up the US economy. Then unfortunately higher rates does the opposite which calls into question future economic readings.

Fed Ready to Raise: The Fed sees all the above and is ready to raise rates. The ONLY reason they haven’t so far is because of the anticipated peace deal with Iran would have greatly eased the inflation picture. But given what I said above, that is staying higher for longer and thus they are prepared to act.

As they say “Don’t Fight the Fed”. That is mostly about lower rates > higher stock prices.

And yes, unfortunately the other part is typically true that higher rates > lower stock prices.

Not necessarily bear market...but a Risk Off adjustment that would likely lead to market wide correction.

Trade War With Canada (Who’s Next?): Nothing positive could really come from an enlarged trade dispute with one of our largest trade partners in Canada (and I mean nothing positive for us or for them).

The worst case scenario is that lingering on and even expanding to other countries.

I find that to be highly unlikely given the several bouts of trade conversations held over the years by the Trump administration. In general, the tough talk is just a negotiating tactic to find more reasonable solutions.

I expect that to be the case here. But until it is resolved it is yet another question mark that gives pause to more bullish conditions.

Mid Term Election Uncertainty: As I discussed at the LIVE webinar on Monday 8/31, the mid term year of the election cycle is historically the worst year. On top of that the couple months before the election can often lead to more uncertainty and weaker stock market conditions until the election results are in hand.

This one is a fairly mild negative unto itself. But when layered on top of the greater uncertainties above does start to tip the scale negative in the short run.

Reity, are you calling for a bear market?

If you are asking the question...then you need to go back to the top of this commentary to appreciate all the notes about long term bull market still in charge. So read that again and then let’s proceed from there.

Bull markets do not go straight up. There are all kinds of pauses, pullbacks and corrections along the way. And given all the negatives in hand, then the odds of that happening now have greatly increased.

So that increases the odds of a pullback unfolding (minus 3 to 5%). Or maybe even a full on correction (10% decline).

Again, it increases the odds...but there is no guarantee of that happening. Because any day could bring a peace deal with Iran that quickly takes most of the top concerns off the board.

Same goes with a harmonious trade deal with Canada. And then there are no negatives weighing down stocks making it quite easy to sprint to new highs.

So, what should we do about this with our portfolio strategy? Nothing.

Just hold tight because when long term trend is bullish then never no when the next rally kicks off and don’t want to be on the sidelines with too much cash. Nor get overly conservative in your approach as those stocks will underperform as any new rally unfolds.

Hey, it’s a free country and you can do whatever you want. I am just trying to explain my point of view and what it means for the Zen Investor and my personal portfolios.

Then again, the Zen Investor is nicely diversified and not overly Risk On. There are ample conservative/moderate elements that will hold up better if any short term disruptions take place. Like our overweighting of healthcare stocks. 

Yet enough Risk On elements that if all the negatives blow away quickly and we are racing to new highs that we will amply come along for the ride.

What To Do Next?

Discover my Zen Investor portfolio that relies upon my greater than 40 years of investing experience. 

During that time I have learned vital lessons from 7 bear markets…8 bull markets and just about everything else the “Mr. Market” can throw at us. 

I use this knowledge to create a detailed investment plan. Then lean into our proven Zen Ratings quant model to select the best stocks given their proven outperformance. 

In total the Zen Investor portfolio now has 20 top stocks that are hand picked for today’s unique market landscape. 

And as shared above it is doing very well in 2026 as our portfolio is up +46.35% YTD far surpassing the benchmarks.  

Plus 2 new stocks were added this week that both have stellar upside potential. 

If you are curious to learn more, and want to see my current top 20 stocks, then please click the link below to get started now. 

Discover the Zen Investor & Top 20 Stocks >

Wishing you a world of investment success!

Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)

Editor of the Zen Investor

Want to get in touch? Email us at news@wallstreetzen.com.