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The S&P 500’s Rally Is in Question. It Doesn’t Mean Stocks Will Plunge.

The New York Stock Exchange.

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Spencer Platt/Getty Images

Investors just don’t feel confident about stocks’ rally over the past few months, but the market could still hold up well this spring.

S&P 500
has risen about 15% since early October, when it hit its low point in the 2022 bear market. There is logic behind the move—declines in the rate of inflation have raised hope that the Federal Reserve will soon stop raising interest rates to cut demand for goods and services—but Wall Street is turning up its nose.

The majority of fund managers surveyed by strategists at
Bank of America,
people who oversee trillions of dollars, see the gain as a so-called bear-market rally. That implies it is little more than a head fake in a larger bear market, defined as a slide of 20% of more from a high. 

“It’s been a hated rally,” said James Ragan, director of wealth management research at D.A. Davidson. “There has been some skepticism about the rally.”

Skepticism makes sense. The S&P 500 is now costly enough that as a percentage of the price, the earnings its component companies are expected to generate don’t stack up well against the yields investors can get from owning Treasury bonds—a safer investment. Forecasts for corporate profits could continue to drop as the Fed’s past rate increases hit the economy, making stocks look more expensive.

And because inflation is still running well above the Fed’s 2% target, there is no guarantee that the next rate increase will be the last, as some investors have hoped. More rate hikes could mean even more pressure on the economy, profits, and stocks. 

Consistent with that, investors are still positioned for a market drop. The average fund in BofA’s survey holds about 5.2% of its value in cash. While that is down from above 6% as money managers have put cash to work in the market in recent months, it is still fairly high. In the past, it has gone below 4% at times.

That suggests that while managers have been buying stocks, they haven’t been gorging on shares. Unsurprisingly, a minority of investors are overweight equities.

Ironically, that is why the market could hold strong for the near term. There’s still a fair amount of cash in funds’ bank accounts, earning less than the potential return in stocks, that managers could sprinkle into the market, pushing stock prices upward. They’d certainly do so if the economy holds up and the Fed continues to make strides in reducing inflation.

To be sure, the S&P 500, at right around the 4100 level, is having trouble moving above 4200, a level where sellers have come in to knock the index lower in recent months. 

Caution—and hope—are warranted.

Write to Jacob Sonenshine at


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