The stock market that seemed doomed just a couple days ago is suddenly screaming, “Buy.”
The S&P 500 Index jumped 2.7 percent Monday for the biggest rally since August 2015, staging a powerful comeback after suffering the worst week in two years. On the surface, the animal spirits were rekindled by reassuring rhetoric from Treasury Secretary Steven Mnuchin, who talked down last week’s trade war bombast.
However, a survey of Wall Street strategists revealed a confluence of forces behind the surge. From equity valuations to chart patterns to fund positioning, the long list of triggers shows a growing bull case that investors can’t afford to ignore.
“This is a market that wants to go up,” said Jennifer Ellison, a principal of San Francisco-based Bingham, Osborn & Scarborough, which manages $4.2 billion.
The bounce in stocks occurred after the S&P 500 closed Friday right near its average over the past 200 days, a key trend line that’s proven to be the market’s support level for the past two years, including the selloff in February.
Moreover, last week’s slump may have cleared a hurdle that many chart watchers were waiting to see before a sustained rally can take hold.
It “sets the stage for a textbook double bottom retest,” Evercore ISI technical analyst Rich Ross wrote in a note to clients. Last week’s selloff “into a holiday shortened quarter ending week offers the ideal short term backdrop for the bulls to regain control of this tape and launch another v-shaped ascent,” he said.
At Friday’s close, the S&P 500 traded at 16 times forecast profits, undercutting the valuation trough reached in early February and approaching levels that defined the market bottom during the last two major events: the U.K. vote to exit the European Union in June 2016 and the U.S. presidential election in November that year.
Corporate earnings, the cornerstone of the nine-year equity rally, are likely to give investors a dose of confidence with the reporting season scheduled to start next month. While President Donald Trump’s protectionist trade policy has whipped up equity volatility, investors will get a first look at the benefit from his tax cuts.
Analysts expect S&P 500 companies to show a 17 percent jump in first-quarter profits,
estimates compiled by Bloomberg show.
Another reason to buy stocks: fund mangers may be done selling. While retail investors have stormed in and out of equities amid this year’s market swoon, professional managers have largely reduced their exposure since February. According to data compiled by UBS Group AG, stock holdings by funds that allocate money across different assets are currently 1.5 standard deviations below their historic average, a stance that’s likely to be revised as the market heads for a new quarter.
“We look for rebalance buying to provide support over the next week,” said Keith Parker, head of U.S. equity strategy at UBS. “Our view remains that equity allocations will drift higher toward last cycle levels.”