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Wall Street is divided on whether a new bull market has begun, and it's easy to see why based on the divergent performance of the major U.S. indices. The widely quoted S&P 500 is up 14% year to date, while the tech-heavy Nasdaq 100 has soared 37%. Meanwhile, the more industrial-focused bellwether Dow Jones Industrial Average has gained a mere 2% year to date.
From a technical standpoint, the S&P 500 has managed a more than 20% rally since its recent low toward the end of 2022, meeting the technical definition of a bull market. But the macroeconomic environment says things aren't as simple as that.
The case for a new bull market
Market watchers who are convinced that a new bull market has begun start with the 20% rally in the S&P 500. But of course, a deeper analysis is necessary. The consensus is calling for the Federal Reserve to stop hiking interest rates and corporate earnings to come in better than expected.
If both of those come to pass, it adds to the bull side of the argument. In fact, multiple economic data points in late June calmed investor fears about a recession. Core capital goods orders rose unexpectedly in May, while sales of new single-family homes surged. Consumer confidence rose to its highest level in almost 18 months.
In line with the growing optimism, Goldman Sachs analysts had previously boosted their year-end price target for the S&P 500 to 4,500. Currently, the index sits at around 4,400. But the S&P 500 plunged more than 19% in 2022 to record its worst year since 2008. Thus, merely rallying 20% from the October low doesn't establish a firm foundation for the bull argument, which sets the stage for the bear argument.
But here's why the bear market might not be over yet
While the technical definition of a bull market is that stocks rally at least 20% from their recent low, there is another element that often gets glossed over. The other traditional rule is that stocks must reach a new high to confirm the new bull market — something that hasn't happened yet.
The S&P 500's record closing high was hit in January 2022 at 4,796.56. As a result, some market watchers may be considering whether the recent rally is a “bull trap” rather than a bull market. A bull trap is essentially a reversal that occurs after it appears that a new bull market has begun. For example, many investors were faked out by the bull trap in June 2022, which turned out to be merely a pause or temporary rally in the larger plunge.
The biggest problem with the bull-market thesis is the large degree of uncertainty pervading the markets. For example, will corporate profits be as high as expected in the second half of the year? Morgan Stanley’s analysts have been calling for a slump this year and have set their year-end target for the S&P 500 at 3,900, warning that U.S. equities are teetering on the precipice of a steep decline.
But despite those concerns, analysts continue to boost their earnings estimates for the S&P 500, giving stocks a firm foundation upon which retail investors can build their hopes. Of course, if earnings come up significantly short of those expectations, the consequences for the stock market could be dire, potentially triggering a new bear market for those who were convinced that a bull market is underway.
What to do now?
Stock market performance is highly varied this year. But the Nasdaq 100's massive tear indicates that this rally is lopsided in favor of technology stocks.
This review of options activity by The Wall Street Journal shows that traders are quite bullish, especially on tech stocks. The Journal noted that over 1.3 call contracts on AMD, Intel and NVIDIA changed hands daily this month on average, putting June on track for a new record-high monthly total.
More broadly, CBOE Global Markets data indicates record options activity on the S&P 500, including soaring one-day call trades. This suggests fear of missing out (FOMO) is resurfacing. In fact, FOMO has widened the gap between the market's best- and worst-performing stocks.
Additionally, Goldman reported that this year's rally has been the narrowest since the dot-com bubble in 2000, with just a small number of tech stocks driving it. The Journal also noted a jump in demand for calls on small-cap stocks that have underperformed in recent months, which could suggest that the tech rally is poised to spread to other parts of the market.
Normally, an explosion of put buying signals that the stock market is about to take a turn for the worst, but that's just not what the options markets are seeing. Thus, advisors can reassure their clients that things aren't as bad as they might seem – despite the doom and gloom they may be hearing from other sources.
But for the bull and bear camps, Warren Buffett's all-weather advice for trading is worth sharing with clients: Be fearful when others are greedy and greedy when others are fearful.
Thomas Young is running for Utah State House District 40. Outside of politics, he is an economist who builds models, researches the economy, advises on public policy, speaks at conferences, and enjoys thought leadership.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
