US stocks are currently experiencing a stagnation. How should investors respond?

Since July 13th, the S&P 500 index has dropped from around 4510 points to 4500 points. The stagnation of the US stock market over the past six weeks has been frustrating for those who lack patience or easily get bored.

Of course, this state of affairs will inevitably come to an end, but investors are likely not pleased with the downward direction.

Why is the US stock market stagnant?

While the emergence of artificial intelligence is driving higher profit growth and technology stocks are closer to breaking new highs, most other stocks are not experiencing significant fluctuations.

For example, the Invesco S&P 500 Equal Weight ETF (RSP), which is equal-weighted to the S&P 500 index, has remained around $150 since early July, fluctuating between $146 and $155. This fund eliminates the influence of large-cap technology stocks by giving equal weight to each stock in the index.

How should we view the market stagnation? The answer lies in the threat to corporate profits, which can put an expensive market in a predicament.

Over the past 18 months, the Federal Reserve has raised short-term interest rates 11 times, and Fed Chairman Powell has repeatedly stated that the Fed intends to maintain higher rates until inflation is back under control.

When the S&P 500 index approaches 4600 points, it is trading at around 20 times next year's estimated earnings, compared to just a little over 16 times at the beginning of the year. This growth reflects optimism about earnings, so the weakness in the global economy could lower expectations and the market.

US stocks may face selling pressure

The problem is that concerns about the economy will not disappear quickly, and if US stocks rise, they will not become cheaper, making it likely that selling pressure will emerge.

If the S&P 500 index falls below around 4300 points, the next "support" level is at 4200 points.

Wall Street's concern is that "the economy is starting to lose momentum... from now until the end of the year, concerns about a hard landing may begin to rise," wrote Tom Essaye of Sevens Report, describing a scenario where the Fed successfully controls inflation but also pushes the economy into a recession.

Knowing all this, what should we do?

For those who want to buy for the long term, waiting for a meaningful decline is the right choice.