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By Elena Popina and Reade Pickert
As hard as stocks plunged last quarter, their recovery in the New Year has been just as swift. A warning to S&P 500 bulls getting used to the upward trajectory: This is where rallies have fallen dead in the past.
While valuation makes a poor tool for market timing, there’s evidence its force becomes felt when the benchmark starts to approach 2,800. It’s 25 points from that level now, after vaulting 18 per cent since Christmas. More ominously for bulls is the sudden squishiness of 2019 profit estimates. It’s tough to fashion a case for more gains when the foundation keeps sagging.
Amid a winter of renewal, the question has lingered — when does shifting sentiment alone become too little to move the market? After all, an 8,000-point round trip in the Dow Jones Industrial Average has taken place since September with nary a ripple in readings on growth. At some point fundamentals will reassert themselves. Some say the time has arrived.
“You’re going to have to see the fundamentals support higher markets and those fundamentals are not great right now,” said Chris Gaffney, president of world markets at TIAA Bank in St. Louis. “It’s absolutely dangerous.”
While the S&P 500 advanced 2.5 per cent in the past five days to cap its seventh weekly gain in the past eight, the index’s next leg up would have it confront the round-number milestone that’s marked the demise of three prior rallies since October.
One explanation for the skittishness is valuation. If the S&P 500 tops 2,800, its valuation based on 2019 average per-share earnings estimates will be 16.5 times forward earnings — that’s the average reading over the past five years, demarcating a level at which some analysts say stocks become expensive.
Worse for bulls, earnings estimates continue to come down, tugging
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