The Market Is Rallying, But Bulls Have Retreated

It didn’t take long for stocks to recover the ground they lost in the first two months of the year, rising nearly 14 percent to within inches of all-time records over the past week. But as the Dow Jones Industrial Average has galloped back up, market bulls have decreased in number.

In the latest Big Money poll conducted by Barron’s, just 38 percent of the 100-plus money managers surveyed considered themselves bullish on stocks through the end of the year. That compares with 55 percent who saw stocks rising when queried last fall.

With corporate earnings set to decline for a sixth straight quarter and economic indicators turning tepid, the fundamentals aren’t terribly encouraging. “We’re in an environment of modest returns dictated by high valuations in stocks and record-low interest rates,” Jeff Schoenfeld, a partner at Brown Brothers Harriman, told Barron’s. “The math tells you that it’s hard to generate returns at these levels.”

The retreat of the bulls hasn’t been met with an encroachment of market bears, however. Instead, nearly 50 percent of the big money managers surveyed held a neutral outlook for the year ahead.

That seems to be the prevailing mood on Wall Street, which saw stocks dip in trading to start the week. Goldman Sachs equity analysts on Monday sent investors a report noting that the S&P 500 had already reached their year-end target of 2,100. “Mediocre economic growth, a mixed earnings outlook and high valuation will limit further appreciation,” the analysts wrote.

Investors are eyeing the relatively high valuation of stocks relative to earnings, a measure that indicates when markets may be reaching an upper limit. As Goldman Sachs noted, the median stock in the S&P 500 is now trading at a valuation in the 96th percentile of historical averages.

Still, demand for stocks remains strong among at least two crucial segments of the investing public: retail investors and corporations buying back their own stocks. As long as those two stock market drivers remain in place, the S&P 500 has fuel.