This market sell-off is an April Fool's joke on investors, says a veteran strategist predicting a 27% rally by year's end

• US stocks had an ugly first quarter, but investors shouldn't lose hope.
• Despite all the concerns in markets, the economy and earnings are in good shape.
• Here's why a veteran investment chief thinks a 27% rally is ahead.

Selling stocks as April arrives would be foolish, a longtime market strategist warns.

A troubling market correction fueled by economic anxiety will soon go the way of winter coats, says James Demmert, the investment chief at Main Street Research, which he founded in 1993.

The S&P 500 just had its worst quarter since 2022 and its ugliest start to a year since 2020, and Wall Street wasn't ready for it. All but two research firms tracked by Business Insider predicted that US stocks would rise this year. A 10% pullback makes meaningful gains in 2025 less likely.

But Demmert, a longtime bull, is unfazed by this sell-off. Instead, he believes investors should buy the dip ahead of a roaring rebound where the S&P 500 vaults 27% from current levels to 7,050 by year's end.

Concerns about the bull market are overblown because the US economy is still in good shape, in Demmert's view. Most business cycles last for at least half a decade, barring sudden shocks, plus growth and the labor market are in solid shape despite recent hiccups.

"There's no signs of real cracking in labor markets," Demmert said in a recent interview. "I see estimates coming down in corporate profits by analysts. I see economic prognosticators saying, 'Oh, this is going to be bad.' I think this economy is going to fool all of 'em."

The economy and earnings are better than feared

Investors are too focused on shaky sentiment and aren't putting enough trust in the catalysts that drove US stocks to record heights in the first place, Demmert said.

Analysts are slashing earnings estimates while economists cut their first-quarter GDP forecasts, as Demmert noted. In response, consumer sentiment is crumbling with tariffs set to ramp up.

Those negative developments have a common thread, Demmert said: they're guesses based on feelings and vibes, which — as investors have seen this year — can change on a dime.

"We get uncertainty, and then we use that uncertainty to make prognostications about where the economy goes, and I think a lot of that is related specifically to human error," Demmert said. "The economic data is fraught with it."

Momentum has long been the backbone of this market. So when the rally reversed, many investors were caught off guard and scrambled to reduce risk, which created a snowball effect.

"This is the first time we've got what I would call a normal pullback since what, last July?" Demmert said. "So it's startling investors and it's causing hysteria, piling on, and everybody's looking for reasons to support [that] this thing can only go lower."

That's not to say that there aren't legitimate reasons for negativity. President Donald Trump's tariff proposals could easily cause trade wars that hurt economic growth and spark inflation.

However, Demmert still thinks that Trump is using tariffs more as a negotiating tool than a permanent policy that will raise revenue for the government.

"It's scary — we have to all admit that," Demmert said. "But our premise has been right from the beginning — and we've been watching Donald Trump for a few decades — this is a walking tall with a big stick. This is getting to negotiating."

If tariffs are less severe than feared, Demmert expects investors to shift their focus back to drivers like deregulation, corporate tax cuts, and productivity gains from artificial intelligence.

But the fastest way to snap the market out of this sell-off is with strong corporate earnings. Profits were way better than expected last quarter, Demmert noted, and he expects similarly robust results again in the Q1 earnings season, which starts in early April.

"Earnings and the economy drive stocks, and earnings and the economy are OK," Demmert said. "And you match that with a P/E ratio that's now compressed — I think you've got a great window of opportunity here."

4 sectors set to rally most

When US stocks snap out of their funk, Demmert anticipates that the rally will broaden away from mega-cap stocks in growth-heavy sectors like technology and communication services.

"We think a broad market exposure is going to work," Demmert said.

Most sectors can benefit from a rising-tides backdrop, though the investment chief is especially excited about four parts of the market: financials, industrials, healthcare, and utilities.

That's a curious combination of groups, since it includes economically sensitive areas — financials and industrials — and acyclical groups that are a hedge against further downside. If stocks find their footing, the sectors that perform best in expansions should take off.

"That's where the market has had the most pain," Demmert said of cyclicals. "We think if you don't own those stocks, this is a great time to take positions in the cyclical sectors."

Defensives may seem like an odd choice since Demmert doesn't think there will be a recession, and the cohort isn't overly cheap anymore. However, he still sees attractive opportunities lurking under the surface in companies like Europe-based biopharmaceutical firm AstraZeneca.