The 40th historical high of the year! Is the target of 6000 points for the US stock market completely reasonable?

The bull market on Wall Street continues. The S&P 500 index closed at a new high for the 40th time this year on Monday, currently less than 5% away from 6000 points.

With the Federal Reserve expected to continue cutting interest rates in the near future, some analysts predict that the S&P 500 index will soon break through the 6000-point mark.

Nicholas Colas, co-founder of DataTrek, wrote in a report to clients on Monday, "With the Fed now officially in easing mode and the U.S. economy continuing to grow steadily, the most likely trend for U.S. stocks is to continue rising."

Colas acknowledges that 6000 points would be an "extremely optimistic" target price. However, he is not the only one issuing bullish research reports. Last Thursday, Brian Belski, Chief Investment Strategist at BMO Capital Markets, raised his year-end target for the S&P 500 index from 5600 points to 6100 points, making him the most optimistic forecaster among major stock strategists tracked by the media.

Belski wrote, "Just as we were surprised by the market's strong momentum in our last target price increase in May, we still believe that only making minor adjustments is not enough."

The most notable part of Belski's target price increase may be that he did not simultaneously raise his expectations for earnings growth this year. According to Belski's calculations, if the S&P 500 index closes at 6100 points by the end of this year, its price-earnings ratio will reach 24.4 times, significantly higher than the average level of around 18 times over the past 10 years.

Belski admits that this "may seem high compared to historical levels," but focusing on the closest historical period is often more convincing than the average, so the focus will be on the soft landing period of 1995. Belski points out, "That was a period when the index was able to maintain a price-earnings ratio of over 20 times for several years."

On the other hand, Lori Calvasina, Head of U.S. Equity Strategy at RBC Capital Markets, has not adjusted her target of 5700 points.

Calvasina acknowledges that there is "upside risk" to this forecast if the economy continues to grow. However, in a weekly report sent to clients last Sunday night, this strategist cautioned that good times in the U.S. stock market do not last, and are always accompanied by twists and turns. With the upcoming election, the net bullish sentiment of the American Association of Individual Investors is high enough to indicate "danger ahead".

These are all bullish indicators that have peaked recently before the recent pullback, but this time things seem different. Strategists are not just talking about the prosperity of artificial intelligence like they were in early 2024 when calling for the S&P 500 index to reach 6000 points.

Earnings of the other 493 stocks besides the "Big Seven" have been rising. The top 10 stocks in the S&P 500 index fell by 0.5% from early July to September 19, while the other 490 stocks rose by 6.2% Belski pointed out that this marks the best performance of the other 490 stocks in the past two years, coupled with the fact that 339 stocks in the S&P 500 Index have outperformed the index itself since the beginning of the third quarter. According to Belski, this is the best period of performance in about 22 years, giving a sense that there is a multi-faceted rebound in the market. Belski wrote:

"We expect this trend to continue and help support further market gains in the coming months, even if the stock prices and fundamentals of the 'Big Seven' continue to slow down."

With the narrative of the Federal Reserve seemingly coming to a temporary conclusion, the third-quarter earnings of U.S. stocks will begin to be released in just over two weeks, serving as the litmus test for the "new bull market". Will the earnings expectations of stocks that investors have been rushing to buy continue to rise? We wait and see