AAfter closing its fourth straight quarter with positive returns on Wednesday, the S&P 500 index paired a close above the 4000 milestone for the first time in its history on Thursday. This means that the broad index is at a record level at the beginning of the second quarter.
The question is, can the good times keep rolling? On Thursday, the index gained 46.98 points, or around 1.2%, to close at 4,019.87. While this milestone is sure to be another major confidence boost for investors, the question of whether the index can continue to rise is not that easy to answer given the many contrary indicators that have surfaced lately, including rising bond yields on stocks as kryptonite.
Additionally, the P / E of the S&P 500 index, which has been trading around 30 for several weeks, isn’t as attractive as it was in previous years when the P / E was close to 20. How did we get 4000, especially during a pandemic? You have to take into account that it took the S&P 500 index only 434 trading days to get to 4000. The last time it hit its previous milestone of 1,000 points (up from 2,000 to 3,000), it took 1,227 trading days.
In other words, it took almost a third of the previous number of days to go to 4000 in almost a third of the way to 3000. So it can be argued that there certainly seems to be tons of euphoria in the market. But euphoria can sometimes be justified. There is optimism that widespread vaccination will lead to an increase in economic growth. Ethan Harris, head of global economic research at Bank of America, sees economic growth of 10% in the second quarter.
The median GDP growth forecast for the second quarter is 9.3%, compared to a 5.8% increase in the first quarter. The market is also focused on the Biden government spending programs, including the $ 2 trillion infrastructure spending plan aimed at boosting jobs. Elsewhere, earnings expectations will rise in the coming quarters, fueled by the reopening of the economic sectors hardest hit by the pandemic.
Are these growth expectations and optimism about the economy well positioned? That remains to be seen. However, knowing that the market is always looking ahead, there is also a likelihood that stocks will be higher based on these assumptions. Another way of saying the S&P 500 milestone of 4,000 might already be priced in. The other things to consider are how this milestone can become something of an anchor. The market is sometimes becoming so fixated on this type of benchmark that this fixation level can lead the S&P 500 to “test” the 4,000 level before it can go higher.
How often this test needs to be done often depends on other factors. However, psychologically, there is an additional layer of risk involved in assessing (or projecting) where stocks might go next. As mentioned earlier, there is still a risk of rising bond yields. And there’s no indication that bond yields will be lower. I now think that volatility can also increase in the second half of the year. That’s not to say that volatility will be a drag on stock prices, but given the state of equities today, that’s an additional component of risk to consider.
Unsatisfactory as it is to answer the question of whether the good times can go on with a “maybe”, all I have mentioned above are the signposts I will look out for that will give us a clearer idea of the answer which will turn out to be “yes” or “no”. Until then, investors should be vigilant and nimble.
The views and opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.
