New highs can beget more new highs

Posted by Cam Hui -

The Dow, S&P 500 and NASDAQ Composite all achieved new all-time highs last week. It is said that there is nothing more bullish than a stock making a new high. This is not a time for caution. Higher stock prices are ahead.
 

 

Here are the reasons why I am bullish.
 

 

Bullish Technicals

Let’s begin with a technical assessment of the stock market. The market printed a “triple 70 breadth thrust” during the May 2–6 time frame, in which the percentage of NYSE advancing stocks exceeded 70% for three consecutive days. The advance sparked a likely “good overbought” condition on RSI, which is a signal of a sustained rally.
 

 

Rob Hanna at Quantifiable Edges studied the effects of triple 70 breadth thrusts and found that the price momentum effects tended to be long lasting.
 

 

The upside breakout to all-time highs was accompanied by strong breadth. The S&P 500, NYSE and S&P 400 Advance-Decline Lines also showed all-time highs, which confirms the strength of the rally. The only exception was the small-cap S&P 600 Advance-Decline Line that was just short of a new high.
 

 

 

Progress on disinflation

From a top-down macro perspective, the market received some welcome news on inflation last week. April CPI came in slightly weaker than expected. Core CPI (blue bars) softened and so did services ex-shelter (red bars). Owners’ Equivalent Rent (green bars) also continued their expected pace of deceleration.
 

 

From a bottom-up perspective, FactSet report that citations of “inflation” have plunged.
 

 

The tame CPI report sparked a bond market rally and cemented market expectations of two rate cuts this year, with the first to occur in September. Even before the CPI report, dovish comments from Fed officials that took a rate hike off the table was helpful to risk appetite.
 

 

 

Valuation Tailwinds

The CPI report inspired bond market rally created some tailwinds on equity valuation. The forward S&P 500 forward P/E has been elevated at 20.7, which ahead of its 5-year average of 19.1 and 10-year average of 17.8.

 

While the longer term trend of valuation divergence between P/E and yields that began in 2022 is concern, in the short-term, falling yields have given some room for P/E expansion, which is a positive.

 

In addition, forward EPS estimates have been rising strongly in the wake of Q1 earnings season, which is nearly complete. This development lends support to high stock prices in the form of positive fundamental momentum.
 

 

Moreover, company guidance has been dramatically improving compared to late 2023 and early 2024.
 

 

 

A welcome growth revival

Lastly, strategist Jim Paulsen made the point that monetary velocity is a form of monetary productivity. In that sense, the U.S. is undergoing a major revivals in monetary productivity, which is helpful for growth and stock prices.

 

 

In conclusion, stock prices have achieved fresh all-time highs and they are rising for the following reasons, which indicate sustainable progress on disinflation and economic growth:

  • Strong technical picture;
  • Progress on disinflation and dovish comments from Fed officials; and
  • Continuing signs of growth.

All these factors are combining to be supportive of high stock prices ahead. While I have no specific target in mind, the measured upside objective from a point and figure analysis of the S&P 500 is an astounding 7469. As is the case with point and figure charting, the time frame for achieving such an objective is unknown.