Market drawdown vs. downturn: Watch the fundamentals

I'm often asked when the next market drawdown will occur. An easy answer is soon enough. After all, 5% to 10% corrections happen in most years.¹ But that's too easy. Market drawdowns have rarely come out of nowhere. They’ve generally been the result of policy uncertainty.

Policy uncertainty has triggered drawdowns

Consider the last two years. This elongated market advance was briefly interrupted by tariffs in 2025 and the war with Iran in 2026.² While the headlines were different, the source of the uncertainty was ultimately the same. Investors were left to assess the implications for inflation and interest rates. Would tariffs prove inflationary? Would higher oil prices keep inflation elevated? Would the Federal Reserve (Fed) need to maintain a more restrictive policy stance than previously expected?

In both cases, markets responded by repricing policy expectations.³ Markets declined.⁴ Yet those drawdowns proved short-lived as the economy remained resilient and corporate earnings remained strong. The feared deterioration in fundamentals failed to materialize.

Today, investors are once again confronting the same questions. The persistence of the conflict in Iran and renewed trade tensions have once again led markets to reassess the policy outlook. Long term interest rates have climbed as investors grappled with a stronger nominal growth environment and the possibility that inflation may prove more persistent than expected.⁵ This occurred despite efforts by the US Treasury to mitigate the rise in the 10-year Treasury yield.⁶ The market has increasingly confronted the possibility that the Fed may ultimately need to raise interest rates and that the economy could slow as a result.

Against that backdrop, some market weakness shouldn’t be surprising. Drawdowns have generally occurred during periods of uncertainty about the path of policy.

Don’t confuse a drawdown with a downturn

What’s important, however, isn’t to confuse a drawdown with the end of a market cycle.

Although markets have gone from pricing in roughly three rate cuts at the start of the year to contemplating two or three rate hikes, credit spreads have remained historically tight.⁷ The small-cap stock and equal-weight S&P 500 indexes have remained near all-time highs.⁸ That has typically not been a characteristic of the end of a market cycle, even if the so-called broadening trade took a breather as higher rates and energy prices weighed on economic growth.

What has the potential to end the structural bull market?

In my view, the end of this structural bull market may more likely come from a break in the artificial intelligence (AI) investment cycle than from a period of Fed tightening. Inflation expectations remained reasonably contained,⁹ and the private sector hasn’t been particularly over-levered.¹⁰ Instead, I’d be watching for earnings disappointments, downward analyst revisions, deteriorating forward guidance, hyperscalers pulling back on investment spending, or signs that investment grade bond markets are struggling to absorb the issuance required to finance the AI buildout.

None of that appears to have materially happened.

Could markets experience a drawdown? Absolutely. Policy uncertainty has often created them. But drawdowns and bear markets aren’t the same thing. A drawdown has typically reflected uncertainty about what policymakers may do next. A bear market requires a meaningful deterioration in fundamentals.

For now, to me this looks much more like the former than the latter.

Important information

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All investing involves risk, including the risk of loss.

Past performance does not guarantee future results.

Investments cannot be made directly in an index.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.

Artificial intelligence (AI) technology companies are sensitive to specific risks such as small markets, business cycle changes, economic growth, technological progress, obsolescence, and regulation. These companies may have limited products, markets, resources, or personnel, making their securities more volatile, especially for smaller start-ups. Rapid technological changes can adversely affect their results. AI companies often rely on patents, copyrights, trademarks, and trade secrets to protect their technology, but there's no guarantee these protections will be sufficient. Significant research and development (R&D) spending doesn’t ensure product or service success.

A bear market is an environment in which stock prices are falling and widespread pessimism causes the stock market’s downward spiral to be self-sustaining.

The Bloomberg US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes US dollar-denominated securities publicly issued by US and non-US industrial, utility, and financial issuers.

A bull market is an environment in which stock prices are rising or are expected to rise.

The Consumer Price Index (CPI) measures the change in consumer prices and is a commonly cited measure of inflation.

Credit spread is the difference in yield between bonds of similar maturity but with different credit quality.

Earnings per share (EPS) refers to a company’s total earnings divided by the number of outstanding shares.

The federal funds implied rate is the difference between the spot rate and the futures rate, which is an interest rate that can be calculated for any security with a futures contract.

Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic, and political conditions.

Hyperscalers are large cloud service providers that can provide services such as computing and storage at enterprise scale.

Inflation is the rate at which the general price level for goods and services is increasing.

Investments focused on a particular industry or sector are subject to greater risk and can be more impacted by market volatility than more diversified investments.

Many products and services offered in technology-related industries are subject to rapid obsolescence, which may lower the value of the issuers.

A market cycle is a trend or pattern that may exist in a given market environment, allowing some securities or asset classes to outperform others.

Option-adjusted spread (OAS) is the yield spread that must be added to a benchmark yield curve to discount a security’s payments to match its market price, using a dynamic pricing model that accounts for embedded options.

The Russell 2000® Index measures the performance of small-capitalization stocks and is a trademark/service mark of the Frank Russell Co.®.

The S&P 500® Equal Weight Index is the equally weighted version of the S&P 500® Index.

The S&P 500^® Index is an unmanaged index considered representative of the US stock market.

Treasury Inflation-Protected Securities (TIPS) are US Treasury securities that are indexed to inflation.

The opinions referenced above are those of the author as of Sept. 11, 2026. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations.