By The recent performance of the S&P 500 and Nasdaq Composite has been nothing short of impressive. Despite a slight dip on Friday afternoon, both indices managed to reach 52-week highs on Thursday and are poised to end the week with gains of 2.3% and 3.1% respectively.
Investors were buoyed by the news that inflation is losing its grip, igniting hopes that the Federal Reserve may pause its interest-rate hikes without causing significant harm to the economy. This positive sentiment resonated throughout the market, extending beyond the usual tech giants.
According to Ed Yardeni, President of Yardeni Research, investors have transitioned from a state of fear to fearlessness in recent months. The resilience of the economy to the Fed’s monetary policy tightening and the continuous moderation of inflation have emboldened investors. This newfound fearlessness is reflected in the low levels of the S&P 500 VIX (volatility index) and the percentage of bears in the Investors Intelligence weekly survey of stock market sentiment, both of which have reached pre-pandemic lows.
Both the S&P 500 and the Nasdaq Composite closed at their highest levels since early April, with double-digit percentage gains recorded for the year so far. While some may argue that stocks appear expensive, investors remain hopeful and focused on potential profits that could be bolstered by declining interest rates. Furthermore, analysts believe that even the biggest stock winners still have room to run.
The Market’s Contrarian Perspective
With the recent bullish sentiment in the market, investors may need to prepare themselves for a potential shift. The market has a tendency to surprise when it moves in the opposite direction of popular opinion. This so-called “pain trade” often amplifies the suffering of many.
According to Yardeni, the current technicals of the market are starting to look precarious from a contrarian standpoint. He believes that a small correction would be beneficial, bringing the S&P 500 closer to its average closing price over the last 50 days, which is approximately 4,250. By doing so, the market can avoid a “melt-up” scenario, where stocks skyrocket due to psychological factors rather than solid fundamentals. As of recent trading on Friday, the index was around 4,510.
Despite these concerns, Yardeni does acknowledge that data continues to reinforce the notion of a disinflationary soft-landing situation, which is keeping investor optimism intact. Consequently, he maintains his year-end target for the S&P 500 at 4,600, a modest increase of 2% from Thursday’s closing index.
While this target may not sound particularly impressive, especially considering the significant gains experienced in 2023, it is still preferable to a potential decline in stock performance during the second half of the year – an argument made by many.
Sources: Teresa Rivas
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