- The S&P 500 paused last week after a breathtaking rally.
- US stocks appear to be at a crucial crossroads heading into this fall’s elections.
- Here’s how investors should hedge against the top risks in markets, according to Truist.
Investors should stay on guard as this market rally loses steam, a veteran strategy chief says.
US stocks have enjoyed an exceptionally strong, multi-month-long surge, but that may be over. Mega-cap growth companies that led the charge higher are starting to give up their gains, as the S&P 500 slid nearly 3% from its peak last week and the Nasdaq Composite fell more than 4%.

During the last major market pullback, Truist's Keith Lerner encouraged clients to buy the dip. The investment chief and the chief market strategist signaled in April that US equities had an attractive risk-reward setup after a 5.5% selloff. Three months later, he can't say the same.
"As you move up, the risk-reward on a short-term basis becomes a little bit less attractive," Lerner said in a recent interview.
An unwelcome combination of pulled-forward gains, a seasonally weak late-summer backdrop, a gradual uptick in jobless claims, and political uncertainty — most notably the increasingly turbulent US presidential election — could keep a lid on stocks in the coming months, Lerner said. It's no wonder why investors are locking in gains.
"All those factors combined suggest maybe a choppier market, even though we still think the long-term bull market is intact," Lerner said.
The bull market isn't broken, but tech may need a break
Although the S&P 500's path forward may not be pretty, Lerner is still confident that US stocks have more upside than downside in the next 12 months.
History suggests that stocks haven't peaked yet, as pullbacks of at least 5% have been typically followed by a 17.4% to 19.5% rally, according to Truist. Both of those marks are higher than what the S&P 500 has logged since April, which leads Lerner to think more gains are ahead.
But for this bull market to be sustainable, investors either need technology stocks to shake off their recent slump and resume their rally, or for other parts of the market to take the reins.
Truist is betting on the latter, as the firm downgraded tech from overweight to neutral in late June after one of the sector's best stretches in decades. That call was well-timed, as it came less than two weeks before the group's eventual downturn.

Lerner said he's willing to reverse course if tech giants shatter expectations during the Q2 earnings season, though the strategy chief thinks mega caps would benefit from a breather.
"In the fall, I think investors will eventually come back to tech because I still think that's the main secular theme of this bull market," Lerner said. "I just think that when you've had such outperformance cycles, the rubber band gets very stretched that you just need some time to digest those gains — let the fundamentals catch up and the earnings drive it."
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If tech takes a pause, Lerner expects other parts of the market to pick up the slack.
The two sectors Truist is bullish on now are communication services and utilities, which Lerner acknowledged is an odd pair. Both can be beneficiaries of the artificial intelligence boom, though in dramatically different ways.
Communications stocks have much in common with tech but haven't risen quite as much this year or in the last three months. Truist has been encouraged by their relatively strong earnings and solid technical trends.
Utilities have become a creative way to ride the AI trend since they're supplying data centers with the power they need. The sector also has some of the market's cheapest valuations.
More broadly, Truist remains bullish on US equities over their international peers and is sticking with large caps over their smaller counterparts, even as they've caught fire in the last week.
To be sure, small caps can maintain their momentum after lagging by a historic amount, Lerner said. The economically sensitive group is in an ideal backdrop marked by solid growth and lower interest rates, which are expected to arrive in September.
"I do think this overall rally for small caps likely has further to go after maybe a little bit of a consolidation that we're starting to see after that kind of moonshot," Lerner said. He added: "Small caps, likely if we think about the next several months, probably still outperform."

However, the strategy chief isn't convinced that the move will carry into the fourth quarter since the cohort's earnings haven't been as robust and likely won't be as economic growth slows.
"This is more, to me, a Fed pivot, extreme underperformance, and positioning that has more to go," Lerner said. "But I don't know that this is a game changer for this bull market where small caps will be leadership."

Outside equities, Lerner said investors should consider hedging against geopolitical and currency risks by adding gold to their portfolios. The yellow metal is up nearly 20% this year and is considered a safe, stable investment in uncertain times.