Traders say there aren’t many reasons to be bearish on the stock market
The stock market has been on a tear lately, hitting new record highs and shrugging off concerns about inflation, the pandemic and geopolitical tensions. Some traders say there aren’t many reasons to be bearish on the market right now, as the economy continues to recover and corporate earnings remain strong.
“The market is in a sweet spot. We have strong growth, low interest rates, ample liquidity and supportive fiscal and monetary policies. The earnings season has been very impressive, with most companies beating expectations and raising guidance,” said Mark Zandi, chief economist at Moody’s Analytics.
Zandi added that the market is also benefiting from the reopening of the economy, as more people get vaccinated and resume their normal activities. He said sectors that were hit hard by the pandemic, such as travel, leisure and entertainment, are seeing a rebound in demand and profitability.
“The market is pricing in a very optimistic scenario, where the pandemic is largely behind us and we can enjoy a post-Covid boom. There are still some risks, such as new variants of the virus, supply chain disruptions and geopolitical conflicts, but they don’t seem to be enough to derail the market momentum,” he said.
Another trader who shares this bullish view is Tom Lee, founder and head of research at Fundstrat Global Advisors. He said the market is in a “powerful” uptrend that is driven by both fundamentals and technicals.
“The fundamentals are improving every day. We have seen a massive upgrade cycle in earnings estimates, as analysts are catching up with the reality of the recovery. The technicals are also very positive, as the market is breaking out of a consolidation pattern that lasted for several months. The breadth and leadership of the rally are also very encouraging,” he said.
Lee said he expects the market to continue to climb higher in the coming months, as more investors realize that they are underexposed to equities and need to catch up with the rally. He said his year-end target for the S&P 500 is 4,600, which implies a 12% upside from the current level.
“The market is not overvalued or overbought. It is still underowned and underappreciated. There aren’t many reasons to be bearish on the market right now. The only reason to be cautious is if you think the market is too good to be true,” he said.
However, not everyone is convinced that the market is unstoppable. Some traders say there are some reasons to be bearish on the market, or at least cautious, as the market faces some headwinds and challenges in the near future.
“The market is too complacent and overconfident. It is ignoring the risks of higher inflation, tighter monetary policy, slower growth and higher taxes. The market is also vulnerable to a correction, as it has gone too far too fast without a meaningful pullback. The valuations are stretched and the sentiment is euphoric,” said David Rosenberg, chief economist and strategist at Rosenberg Research.
Rosenberg added that the market is also facing some seasonal and cyclical headwinds, as the second half of the year tends to be more volatile and less favorable for stocks. He said the market is also nearing the end of a bull cycle that started in 2009, and that a bear market could be looming in the horizon.
“The market is due for a reality check. The easy money has been made and the hard part is ahead. The market is not prepared for a change in the macro environment or a shift in the policy stance. The market is also running out of steam and catalysts to go higher. There are many reasons to be bearish on the market right now, or at least to take some profits and reduce risk,” he said.