Are stocks on their last legs or will the rally continue? The answer is yes.
That’s to say that analysts are taking both positions. While the S&P 500 is again near record levels, and corporate profits are rising smartly, Morgan Stanley analysts warn that “Fewer stocks are carrying the load of the market, a sign of exhaustion and, in our view, a bad signal for further price gains.”
The momentum that has carried markets forward could break down and lead to a correction, their thinking goes.
Indeed, Bloomberg points out that Amazon.com, Netflix and Microsoft accounted for 71% percent of the S&P’s gains through early July. Along with Apple, Alphabet and Facebook, they accounted for 98% percent of the gains. But it rings a positive note: “The S&P 500 Index is almost back to its all-time high reached in January despite a litany of adverse shocks on the domestic and international fronts. It’s not that these shocks don’t matter. It’s just that they pale in significance against the market’s cheap valuation.”
Meanwhile, The Wall Street Journal notes that some traders are “piling into [options] bets that share prices will rally higher and volatility will remain muted.”
Both “the macro and earnings backdrop set up well for [the S&P 500] to grind higher in the near term,” wrote Mandy Xu, derivatives strategist at Credit Suisse.