(Yahoo! Finance) - Veteran trader and Thinkorswim founder Tom Sosnoff is a contrarian by nature.
And where markets are currently trading has set off a few internal alarm bells.
"It's not that I think we're rolling over and crashing or anything like that, but I just think the odds favor the downside in the market," Sosnoff told me on Yahoo Finance's Opening Bid.
Sosnoff added, "I think there's a lot of stocks that are very fairly priced, and I know there's not a lot of other things to invest in and things like that. But I will just say that I think stocks are fully priced. And I think if you do get any kind of momentum to the downside, like we saw last April — and I expect to see something like that maybe in March or April or May this year — I think you're going to get a little nasty sell off, maybe 10% to 15%."
To Sosnoff's point, there isn't much margin for error being priced into markets.
Wall Street is expecting a big year for corporate earnings based on the view that mostly everything — from the economy to AI productivity to geopolitics — goes great. This optimism has powered the S&P 500 (^GSPC) beyond 7,000 for the first time, with the Dow Jones Industrial Average (^DJI) knocking on the door of 50,000.
S&P 500 earnings are estimated to increase by double-digit percentages in each quarter of 2026, according to FactSet data. Earnings growth is expected to be the strongest in the fourth quarter at 18.1%. For the year, earnings are being modeled to grow 15%.
Meanwhile, the bottom-up strategist's price target on the S&P 500 is a lofty 8,010 — up about 18% from current levels.
In turn, the forward price-to-earnings ratio (PE) for the S&P 500 is 22 times — well above the 10-year average of 18.7 times. Stocks are almost as richly valued as when they hit a peak in early January 2022. What followed was the start of a nine-month bear market — the benchmark index plunged about 19%.
The backdrop for stocks, however, is anything but perfect.
Fed Chair Jerome Powell revealed Sunday night that the Justice Department served the central bank with grand jury subpoenas, threatening a criminal indictment related to his testimony before the US Senate. At issue: reportedly, the central bank's renovation of its Washington, D.C., headquarters and whether Powell misled Congress about the project's depth.
In a video statement, Powell described the investigation as "unprecedented" and questioned the motivation for the move. The administration has been vocal in its desire for lower interest rates. Powell affirmed that he carried out his duties as Fed chair "without political fear or favor."
Most investors have never seen a heated battle between the Fed and the president play out in a public forum. While Trump has repeatedly attacked Powell since retaking the Oval Office, the latest news ratchets up the situation to a whole new level.
Pros I have spoken with said this dust-up wasn't on their bingo card and adds uncertainty into markets — especially the very important bond market.
"First, I just want to say that I don't agree with everything that the Fed has done," JP Morgan (JPM) CEO Jamie Dimon told reporters on a call after earnings on Tuesday. "I do have enormous respect for Jay Powell the man. Everyone we know believes in Fed independence, and so do we. And anything chips away at that is probably not a great idea. And in my view, it will have the reverse consequences. It will raise inflation expectations and probably increase rates over time."
Meanwhile, the jobs report for December showed a mere 50,000 jobs created, below consensus estimates for 70,000. A stretch of more reports like this could undercut the optimism on corporate earnings in the first half of 2026.
There is also no guarantee that the Fed will cut interest rates several times in the front part of the year as the consensus expects, SlateStone Wealth chief markets strategist Kenny Polcari told me on Opening Bid. That would be due in part to inflation cooling, and it's hard to justify additional rate cuts with the stock market at a record.
"Since the launch of the current rally, we have witnessed a steady reinforcement of bullish momentum across a broad range of market indicators," the team at Sundial Capital Research wrote in a new note. "Historical backtest data continues to build a compelling case for the ongoing uptrend. At the same time, the latest readings from sentiment and valuation metrics offer a critical reminder to investors. Ride the trend, but do not fall in love with it."
By Brian Sozzi · Executive Editor
