For some time now, a number of strategists have been saying we may be headed for a correction. Charles Schwab’s Liz Ann Sonders says we may be getting one — without the market decline usually associated with a correction.

In commentary on Schwab’s site, Sonders, along with Jeffrey Kleintop and Brad Sorensen, says that “a modestly overvalued market can be corrected through either price or time.  At this point, time seems to be the method in force.  With prices staying roughly in place, earnings have a chance to recover, resulting in more attractive valuations.”

The problem, they say, is that earnings growth is expected to be negative in the first and second quarters, meaning valuations won’t catch up soon.
“According to BCA Research, there have been three non-recessionary periods since the 1970’s when quarter-over-quarter profit growth has been negative, such as what is expected in this years’ first and second quarters,” they write. “Soon after these occurrences, the market experienced corrections, which were ultimately short-circuited by Federal Reserve easing — not a likely option this time around.” They believe the earnings headwinds will be temporary, “but also believe that gains in stocks will be harder to come by in the coming months.”

The bottom line, according to Sonders, Sorensen, and Kleintop: “Volatility will likely continue and more sideways action could be in store for the US equity market.  We believe US economic data will start to rebound, helping push stocks higher in the second half of the year. … Better near-term opportunities may exist overseas as the Eurozone economy is improving and Japan seems poised to rebound from soft data.  Get, or stay, diversified and consider international stocks for your portfolio according to your risk tolerance.”