What is the bull case on the S&P 500 right now??

I don't understand what is keeping the market up. What are you playing for if you are long? Recession coming is almost consensus now and yet the market still holds up around 3,000. What are all of the bears missing?

The bear case is quite clear:
-Fiscal benefit to the economy from tax cuts is fading;
-Recession risks from elevated debt (credit card, auto where credit quality deteriorating, student loan, corporate);
-Housing price growth slowing if not already peak;
-Unemployment rate at peak (even the U6 is peakish)
-China trade war is a headline risk;
-Healthcare choking the consumer and will get worse else it's reformed to provide much lower prices (which would in turn crash 20% of the US economy);
-Already seeing recession in some countries;
-2020 political risk: Biden winning feels like negative news, Bernie or Warren winning feels like awful news to the market on risks of a rollback in tax stimulus;
-Business investment slowing;
-Earnings entering recession;
-Yet the s&p is still expensive on earnings.

The only bull case I can muster up is recession in 3 years rather than 1... but then you are playing a horrifically weak hand - you are a seller at the first data point indicating recession so why bother buying? You are better off going to Vegas and betting on 13-36 on roulette every year.

I'm looking for a fundamental explanation here rather than technical color (mumbo jumbo on Fibonacci levels) or trading color (eg corporate buybacks)


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Comments (24)

Aug 13, 2019 - 5:34pm

Lmao. The bull case is that Trump is the second coming of Christ. He will save the world.

Really though:
Interest rates falling to prop up the economy (fed funds + new QE) will lower bond yields, and money will stay in equities to capture yield.

I'd argue that there is still a good amount of labor market slack U6-U-3. Wage growth is in line with what is expected from the best models. https://www.epi.org/blog/wage-growth-labor-market-slack/

The bear case makes much more sense. The truth is that aggregate fund flows for equity mutual funds are determined by ordinary people, not the smart money. So while managers can use their 5-10% cash positions to play around with the market a little bit, by in large the price of the market is set by fund flows. The issue is that people who allocate between credit, equities, and other financial instruments aren't watching what's going on all the time. The market isn't trading on fundamentals, and that should be concerning to anyone looking to make money.

Corporate Debt and National Debt are increasing by quite a bit so there could definitely be some issues there. Look at Debt to GDP, and the inflation-adjusted deficit to get a better sense of it rather than the absolute size that the news uses to sensationalize the issue. Also corporate market value of debt to equity ratios are misleading because equities increase faster than credit does during expansions and you don't see overleverage until the equity market tanks.

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Aug 13, 2019 - 5:59pm

The wage growth argument is interesting. Wage growth is slower than late last cycle still (even though U6 is below last cycles trough and almost to the late 90s trough). If you subtract off CPI yoy% to get a "real wage growth", it seems that we are actually slightly above last cycle, and in line with the late 90s cycle. It is debatable whether wage growth or CPI-adjusted wage growth is the right thing to look at

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Aug 13, 2019 - 6:07pm

PCE adjusted is better because it's a chain-weighted index. I don't bother with CPI at all because the Fed targets the personal consumption expenditure at 2% annually.

Aug 13, 2019 - 5:50pm

Following, also interested. I think to an extent we're getting a little bit of cheeky rates decision coupled with pretty ambiguous verbiage from recent FOMC minutes. My question is similar to yours except instead of "why is the S&P expensive?" it's "why are we further slashing rates?" The feds purview should be strictly limited to how to quell unemployment, maintain target inflation rates, and smooth the credit markets so that free access to capital doesn't start letting smart money chase dumb markets. Seems to me that they're taking away an already limited cushion of rates when the downturn inevitably comes. To answer your question, I can't really make a bull case other than consumer sentiment, because no quantitative factors look like a necessarily smooth mid-term environment to me.

Aug 13, 2019 - 6:48pm

LeveredBetaBoy I don't buy the rates cushion argument. I think that the neutral interest rate doesn't react as much to short term rate decisions as a lot of people like to think.

EatClenTrenHard QE 4 will provide additional support if we move to the ZLB fed funds rate. A case can 100% be made that historical recessions were spurred by the Fed raising rates by so much in the first place.

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Aug 13, 2019 - 6:06pm

More QE and Central Bank interest rate cuts seem to be the only bull case. I don't buy it and I've shifted my holdings to predominantly cash.


Aug 13, 2019 - 6:10pm

A number of prominent investors have moved their holdings into a number of REITS with high dividend yields. I think that the real estate market will fare better in a downside case for the economy because of greater momentum in RE prices compared to the equity market. Lower interest rates also help the case that RE can help investors to maintain reasonable returns.

I'd stay away from equities besides very high conviction ideas. (I'm not including REITS as equities even though they are traded on the exchanges)

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Aug 15, 2019 - 8:48pm

If the stock market gets crushed, REITs will also get crushed.

Aug 13, 2019 - 8:32pm

This is hard to argue with but what about (1) an enormously accommodative fed that keeps down borrowing costs and volatility, (2) massive domestic spending (eg infrastructure bill, defense) by a second term trump (he has to be the heavy favorite), (3) a potentially groundbreaking trade deal with China and (4) no sign of inflation to force higher rates (perhaps because automation has broken the relationship between unemployment and wage growth?).

These points seem silly after a 10 year bull market, but they're mostly for the the sake of argument. Make of them what you will lol.

Aug 14, 2019 - 1:22am

The main issue with Fed accommodation (at least with regards to tariffs) is that the Fed is set up to deal with demand shocks, not supply shocks. Stagflation will be the result if the Fed continues to accommodate the trade war. Domestic spending could help, but the inflation adjusted deficit is so large that continued spending increases could be seriously detrimental to the economy.

The philips curve relationship definitely still holds, but just looking at a few years of data can be very misleading.

Trade deal with China is a good point. I just worry about the increased corporate and government leverage that has been piling up.

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Aug 15, 2019 - 8:02am

you must be new here, I'm the resident sucker/permabull/asshole of WSO, here's a thread I did about 9 months ago


TLDR - I'm long term bullish, I've not seen broad based excesses that lead me to believe the downside is like the GFC or tech bubble. I own quality companies (low debt, reasonable valuation, dividend growth, lots of cash, etc.), have a long term time horizon, and so don't worry about this stuff too much.

finally, sentiment is in the fucking toilet, currently a 21 out of 100, and while this is only good as a short term indicator, it's times like these where you get your buy list ready, not flock into gold or US10's paying less than 2% - https://money.cnn.com/data/fear-and-greed/

Aug 15, 2019 - 8:43am


How would you respond to the below counterpoints (i am following the 4 numbered points in your previous post, albeit out of order)

  • Consumer balance sheets: debt service ratio only low because interest rates are low. Once inflation inevitably picks up we'll see right through this and the current debt load becomes unsustainable.

  • CAPE: Nothing to say

  • Peak Margins: Aren't we already starting to see this? I don't care about this one quite as much frankly.

  • Old age of cycle: True, GDP recovery has been more shallow - that probably just explains why the recovery was able to be longer... but where is the future growth coming from when U6 is peak? Automation seems like a tough argument when business investment is stalling out.

  • No Excesses (not one of your 4 points but worth talking about!): Healthcare's share of US economy has blown out of proportion - is the healthcare system not an excess?

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Aug 15, 2019 - 10:23am

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