Stocks Still Have Upside Potential, Despite Correction Risk
We continue to think the outlook for US equities remains strong over a multi-quarter period. From a technical perspective, the monthly and quarterly charts of the S&P 500 are starting to look overbought, which previously corresponded with a cyclical top in stocks as was the case in 2000 and 2007. That being said, we are not too concerned at the moment as the price action can remain overbought for several quarters before any correction takes hold, and as we detail below, the fundamentals and valuations are not stretched either. In the event of a retracement, significant support exists at the 1,550 level, as well as trendline support at the 1,420 level should there be a more pronounced correction. These levels of support would provide good entry points for investors.
As alluded to above, although the technicals are starting to look slightly overbought, fundamentals and valuations continue to suggest further gains in US stocks over the coming quarters. In terms of the fundamentals, we highlight that earnings, profitability, leverage, monetary policy, opportunity costs and fund flows all remain supportive.
Earnings To Remain Positive Factor
|US Equities Looking A Little Toppy|
|US - S&P 500 Equity Index & RSI (Below)|