A respected Wall Street strategist who had been bullish on U.S. stocks now warns that the market is overheated and is facing a possible 4 percent to 7 percent drop.
Tony Dwyer, Canaccord Genuity's senior managing director and chief market strategist said he is way of three factors:
- heightened levels of investors' optimism.
- record low levels of implied volatility.
- the relatively high percentage of S&P 500 components above their 10-, 50- and 200-day moving averages at market highs.
"So it's kind of a combination of all these things that creates an environment that's ripe for just kind of a nasty little pullback," Dwyer told CNBC.
But shrewd investors may ask: Why worry?
The CBOE Volatility Index (VIX) recently fell to its lowest level in 2 ½ years and the Dow Jones industrial average has cracked the 20,000 milestone.
Meanwhile, according to a recent Investor Intelligence poll, 61 percent of newsletter writers are optimistic about stocks, which suggests "overly bullish" sentiment, the strategist wrote, according to CNBC.
"It's just a market's that's ripe for an out of-nowhere kind of news item that talking heads like me can't predict," he admitted.
A 5 percent drop "may be imminent," and it's upon seeing such a pullback that investors should buy, Dwyer said.
Still, once the market does bounce off of its consequent lows, that rise should be "significant," he said.
Dwyer isn't alone in forecasting a volatile market in first few months of Donald Trump's administration.
Veteran financial guru Larry Kudlow, who served as the Trump campaign's senior economic adviser, is very optimistic that the stock market can continue its record bull run, but warns that there will be some rough patches ahead.
Kudlow recently told CNBC Trump has the potential to be “a very dynamic leader” by reviving economic growth with his tax-cut strategy, which in turn will restore Americans’ optimism.
"I’m an optimist on stocks but there are going to be corrections,”said Kudlow, a Newsmax Finance Insider, radio talk-show host and CNBC senior contributor.
“There are going to be corrections. I don't want to be Pollyannic. There are going to be tough corrections,” said Kudlow — host of "The Larry Kudlow Show" and author of "JFK and the Reagan Revolution: A Secret History of American Prosperity," written with Brian Domitrovic and published by Portfolio.
A correction is a reverse movement, usually negative, of at least 10% in a stock, bond, commodity or index to adjust for an overvaluation.
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