S&P 500 still struggles to break 4200 points, what kind of positive news does the US stock market need?

In 2023, the S&P 500 index rebounded all the way and approached the key level of 4200 points.

But now, the US stock market has become risky and needs more good news to continue to rise significantly at this level.

S&P 500 is difficult to break through 4200 points

Since touching the low point related to recent banking problems in March, the index has risen nearly 8%. The initial factor driving the rise of US stocks is the stabilization of bank deposit outflows.

In addition, inflation continues to decline, clearing the way for the Federal Reserve to stop raising interest rates soon. Overall, the market believes that it is reasonable for the economy and corporate profits to maintain the current level.

But the S&P 500 index has recently been difficult to break through this high level. The last time the index was above 4200 points was in August last year.

Since then, the index has briefly rebounded to this level, but then the bears entered the market.

Overvalued

Consistent with this, this level usually indicates that the valuation level of the index is relatively high. Currently, the total forward P/E ratio of the S&P 500 index is slightly higher than 18 times, slightly higher than 16 times at the beginning of this year.

This means that based on next year's earnings per share, the S&P 500 index component stocks will bring investors a return of about 5.5% (the reciprocal of the P/E ratio), only about two percentage points higher than the 10-year US Treasury bond yield.

Morgan Stanley said that this is not a very high return for the stock market, especially considering that the long-term return on US stocks is often more than four percentage points higher than US bonds.

This means that higher EPS will help the market break through this key level.

Currently, high P/E ratios indicate that investors are confident in the continuously growing income stream in the future, so disappointment in profits should push down the stock market.

Will the first quarter earnings season be good?

The good news is that the first quarter results are easily exceeding expectations, but Netflix's financial report is obviously unsatisfactory, and the subsequent technology giants are also under considerable pressure.

Therefore, the market may need an explosive first quarter earnings season to break through new highs.

A strong economy will also help. This will drive corporate profits higher, but there is also a problem: an overheated economy may mean that the Federal Reserve will raise interest rates several more times, thereby suppressing economic growth.

Therefore, the market may need to have the best of both worlds: the economy remains strong, but not so strong that inflation remains high, leading to more interest rate hikes.

Of course, the index may rebound to slightly above 4200 points.