A market that refuses to go down will inevitably go up, and that’s exactly what we are seeing at this stage. Despite the delay in Fed rate cuts, investors are holding onto the stock market tightly. The S&P 500 continues to reach new highs, even as Fed officials warn against cutting rates too soon. This positive trend is expected to continue unless there is a significant negative catalyst.
What could potentially derail this bull market? That is the focus of today’s discussion.
One popular investment saying is “It’s a bull market until proven otherwise.” This highlights the stock market’s natural tendency to move higher. On average, bull markets last 63 months, while bear markets only last 13 months. It is harder to create a bear market than most people realize, requiring extraordinary events to shake stocks off their bullish trajectory.
There are two main factors that can lead to a bear market. The first is the formation of a recession, which impacts earnings outlook and reduces risk-taking, resulting in lower PE for stocks. The second reason is an equity price bubble that bursts, as seen in 1929 and the tech bubble of 2000.
Currently, the economy is growing at a healthy pace, with the GDP Now estimate for Q1 at +2.5%. This does not suggest a recession is forming. While there is concern about the Fed’s rate hikes leading to a future recession, Powell and his team seem to be managing a soft landing effectively.
The current PE of the market is in the top 5% of all time, raising questions about overvaluation. However, investors’ improved understanding of risk and reward in the stock market compared to bonds and cash has led to higher PE ratios in recent decades, making historical standards somewhat outdated.
The PEG ratio, a valuation metric indicating what you are willing to pay for each unit of earnings growth, shows that the market’s current level is not cause for alarm on the valuation front.
Although some groups are overvalued, like the Magnificent 7 stocks and certain AI companies, there are opportunities for profit-taking and investment in undervalued companies.
In conclusion, it’s a bull market until proven otherwise. With the potential derailments of recession and overvaluation addressed, it is safe to remain fully invested in stocks. Consider focusing on value investing and keep an eye on overripe stocks due for a fall.
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Wishing you investment success!
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SPY shares were trading at $514.66 per share on Friday morning, down $0.15 (-0.03%). Year-to-date, SPY has gained 8.28%, compared to the benchmark S&P 500 index.
About the Author: Steve Reitmeister, also known as “Reity,” is the CEO of StockNews and shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background and access his recent articles and stock picks.