The stock market rally seems to have defied gravity, leaving sellers waiting for something to trigger a drop. At some point, they will have to give in and buy shares.
up about 25% from the bear market low of early October. While it may be reasonable for the market to rally a bit since then, the magnitude of the rally has caught many off guard. Fueling the gains is hopes the Federal Reserve will soon end its interest rate hikes, as inflation continues to cool. The idea is that when rates stabilize, the economy and corporate profits will do the same. But there is a short-term risk to earnings due to the impact of higher interest rates that occur when deferred.
Meanwhile, the market is expensive right now, with the S&P 500 index trading at more than 19 times forward earnings per share estimates. This number increased about 15 times at the beginning of the rally—compared to how high is the interest rate, it’s a historically high multiple.
That’s why any event can cause the market to turn around, such as Treasury bond yields increase happened in the first week of July. In another example of something that normally pressures markets, the federal funds futures market still expects the Fed to raise rates one more time or two before it closes. A possible future drag on the market could be companies’ dim prospects for the second-quarter earnings season.
And yet, stocks have generally edged higher, choosing to ignore such headwinds. The market seems laser focused on the final rate cut and promotion will bring profit.
That means, at some point, the market pessimists will have to “give up” and give up their pessimism and choose to buy stocks. That point seems to be approaching: Evercore strategists wrote that around 4560 for the S&P 500 is where bears will turn more bullish. The index is currently above the 4500 level. The 4560 level would be just over 27% higher than the October low.
That increase would reflect something seen in the past. During the financial crisis, the S&P 500 rallied just over 27% from its lows—only to fall back to that low as it priced in the impending recession. So if the index hits 4560 and holds steady and shows little sign of cracking, bears will likely assume the market is out of recession fears — even if a recession is mild. happening in the near future.
At that point, if the bears can’t beat the market, maybe they will get in.
Write to Jacob Sonenshine at [email protected]