Tuesday was a huge day for tech stocks.
After earnings beat expectations on Monday after the close, Netflix (NFLX) shares gained 9% on Tuesday pushing the company’s market cap to north of $100 billion and dragging higher the tech-heavy Nasdaq, which paced gains among the major market indexes.
The Dow actually lost ground Tuesday, falling 3 points, while the S&P 500 rose 0.2% and the Nasdaq hit 0.7% as each of these indexes hit records.
The economic calendar will be a bit more busy, with the preliminary reports on manufacturing and service-sector activity in January from Markit Economics set for release, while the December reading on existing home sales should be the economic highlight.
Strategists can’t keep up with the market
Stock market strategists are chasing the stock market higher.
On Tuesday, Bank of America Merrill Lynch’s equity strategy team became the latest to raise its price target for the S&P 500 in the wake of tax cuts, joining Credit Suisse and Citi. BAML now expects the S&P 500 to hit 3,000 by year end, up from 2,800 previously. The S&P 500 closed at 2,839 on Tuesday.
But this latest increase in expectations for the stock market follows what’s been a stellar start to the year for stocks, with the tech-heavy Nasdaq up more than 8% year-to-date as of Tuesday’s close.
“We here raise our 2018 year-end S&P 500 target to 3,000 (from 2,800), reflecting upside forecasted by four of our five target models, as well as our 6% higher normalized EPS forecast reflecting the recurring impact from tax reform,” Bank of America wrote in a note to clients.
Bank of America’s five-factor model for the S&P 500 is saying, essentially, that current market momentum, long-term valuations, and investor positioning points to markets moving higher.
The firm is still, however, looking at the recent moves in the market with a skeptical eye, writing that “we are watching for signs to temper our enthusiasm on the S&P 500. And with 11 of our 19 bear market signposts having been triggered, the risk-adjusted reward of stocks appears less compelling.”
Bank of America adds that “since 1968, at least 80% of our signposts have been signaled ahead of prior market peaks.”
In its note, Bank of America also highlights that before the market peaks, returns are often stellar. On average, the S&P 500 has gained 58% in the two years before the market peaks and 25% in the 12 months before the top for each market peak dating back to 1937.
In the last year the S&P 500 has gained 23%; over the last two, the benchmark index has gained 49%.
Additionally, these rallies tend to account for 44% and 19% of the cycle’s total return, respectively — meaning that missing out on the final days of a bull market will leave investors who bail too early without a good portion of the rally’s gains.
In recent months, the idea that we’re entering a “blow off top” phase of the markets has made the rounds, notably with Jeremy Grantham’s missive published earlier this month, which said the market is “currently showing signs of entering the blow-off or melt-up phase of this very long bull market.”
But as Bank of America’s work shows, missing these finals days can be painful. And no one ever got in trouble being too bullish.
Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
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