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A trader works on the floor at the NYSE in New York

Reuters

  • Even as the stock market continues to hit record highs, bearish investors are not convinced.
  • Many note its been nearly a year since the S&P 500 had a 5% correction, and some investors are waiting for that sell-off before jumping into stocks.
  • These are the 5 bearish arguments analyzed and dismantled by LPL upon further scrutiny.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

The US stock market is on track to close at a record high for the 53rd time so far this year on Monday, and may investors are concerned its too far, too fast.

It has been nearly a year since the S&P 500 has experienced a 5% correction, and many investors are waiting for that sell-off before buying stocks.

In a note on Monday, LPLs chief market strategist Ryan Detrick argued that investors should continue to favor stocks over bonds despite the record highs.

Detrick analyzes five common bearish arguments on the stock market, and dismantles them upon further research.

These are the 5 bearish arguments on the stock market investors shouldnt fall for, according to LPL.

1. Equities have gone too far, too fast.

One of the common bear worries is stocks moving up a lot means stocks will come down a lot. That simply isnt true. In fact, when the S&P 500 is up more than 15% year-to-date at the end of August, the final four months have been up the past five times, with the last three up 9.6%, 7.9%, and 10.4%. The average return in the final four months after a great start to the year is 4.2%, Detrick said.

2. Strong earnings have just been due to easy comps.

It is true that a good portion of [second quarter earnings] growth was due to the lockdowns in the year-ago quarter boosting the growth rate. But that isnt the whole story. Our S&P 500 earnings per share estimate for 2021 is $205, up 46% from $140 in 2020, and, even more impressively, 26% above the pre-pandemic level of $163 in 2019.

We expect corporate Americas efficiency and the strength of the reopening to continue to power earnings ahead and lead to additional gains for stocks over the rest of 2021, Detrick said.

3. Cyclical stocks are flashing a warning sign.

It is true that cyclical stocks have largely underperformed the market over the past several months. However, the context of these moves is lost when looking at recent performance... Despite recent underperformance, all of these groups remain above upward-sloping 200-day moving averages, a sign that the uptrends are firmly intact.

We believe that recent underperformance is simply working off extreme overbought conditions, but those conditions are bullish over the longer-term. Perhaps most importantly though, we are seeing signs that this underperformance may be coming to an end, Detrick said.

4. A taper tantrum is coming.

Equity and fixed income investors are worried about a potential taper tantrum when the Fed starts to reduce its bond-buying programs. The Fed has been communicating its intentions to eventually taper bond purchases for several months now. Markets should be well prepared at this point as the Fed learned its lesson from 2013 and has done a much better job communicating its intentions. Moreover, we think we are still several years away from full monetary normalization. After tapering ends, the Fed will likely wait some time before it starts to raise short-term interest rates, Detrick said.

5. The White House agenda will derail the bull.

We dont think Washington policy developments are a serious threat to broad markets in the near-to-medium term. A direct connection between policy and broader market direction is rare. Even when it comes to the narrow impact of policy on an individual sector or industry, the outcome for markets may not be in line with what conventional wisdom expects. Policy does matter, but unless theres a glaring mistake, its unlikely to be a policy decision that takes the bull market down, Detrick said.

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