It's difficult to predict that the market has reached its top when investors lack the hyper-enthusiasm indicative of such periods. And evidence suggests that to be the case. Two-thirds of the American Association of Individual Investors declare themselves as either bearish or neutral. Bullish sentiment peaked a month ago, prior to the current escalation in geopolitical violence.
Conversely, retail gasoline prices are trending lower. Typically, when gas prices become less expensive, investors become more positive towards equities.
So, we estimate that either geopolitical negativity - which is at a crest - will overwhelm investors and send the S&P 500 back to its 150-day moving average (5% below current prices), or investor jubilation will carry markets higher.
The best news? The recent bull market has been elevated by a combination of rising P/E multiples and earnings. This being a rare and quite positive combination. For markets to move higher, they require either strong earnings growth or solid P/E multiple expansion. Traditionally, markets rising on P/E expansion are stronger than those lifted by earnings growth. Here, the market has been relying on both -- giving it better-than-typical energy levels.
The Bottom Line
So long as inflation remains in check and earnings growth is strong, the chances of incurring a major correction are slim. Of course, we could see plenty of market drops in the 5-7% range. But the larger, terrifying variety remain less likely in the current environment.
Major markets finished higher last week. The DJIA rose 0.92%, the S&P 500 advanced 0.54%, and the Nasdaq added 0.34%. Small cap stocks declined 0.72%. And the 10-year Treasury bond yield was fell 4 basis points to 2.48%. Gold lost $27.52 per ounce, or (2.06)%.