Last week’s new highs for the S&P 500 have some thinking that stocks may not have much more room to go higher. The support from steady growth in the U.S. economy, Fed policy, and seasonality are among the key reasons why we recommend suitable investors consider maintaining current equity allocations at market weights (in line with benchmarks).

Analysis of how stocks have done historically after reaching new highs provides us a level of comfort. Based on data back to 1950, S&P 500 performance starting from a record high has been very similar when compared to all rolling six-month periods—both have produced gains of more than 4% on average.

Also, record highs historically have not been followed by a large number of major corrections. Based on analysis from our friends at Strategas Research Partners, during the six-month periods following record highs, steep declines of 10% or more occurred in less than 5% of all observations. Gains of 2% or more were common, occurring more than two thirds of the time.

New highs or not, we maintain our preliminary year-end 2020 S&P 500 target of 3,200, about 4.5% above current levels. That target is based on a price-to-earnings multiple of slightly over 18, which we view as reasonable in the current environment of low inflation and low interest rates, and our preliminary 2020 S&P 500 earnings per share forecast of $175.

While new highs have tended to be followed by more new highs, short-term pullbacks from new highs also have been totally normal. We would look at the 200-day moving average on the S&P 500 at 2,885, about 6% below Friday’s close, as a potential target to consider buying a dip, or equities on weakness.

Risks Remain

While we are comfortable maintaining equity allocations at benchmark levels despite the new highs, that doesn’t mean we are dismissing the risks. Unsettling U.S.-China trade headlines emerged last week suggesting that—even if a phase-one agreement is reached—a phase-two deal may be a long shot. We still expect a narrow deal to be finalized later this month, but another flare-up of tensions could easily transpire, even after a phase-one deal is reached. China may not budge on some of the thorniest issues, and President Trump may not be willing to roll back enough tariffs to satisfy Chinese demands.

Beyond that, we believe domestic political risk will remain high as the 2020 campaign gets rolling and the impeachment inquiry process continues. In addition, continued geopolitical risks around the world—Iran-Saudi Arabia, Hong Kong, Japan-South Korea, Brexit, Italian debt—could potentially lead to a pullback.

Still, we’re looking forward to what history has said can be the best six months of the year for equities. With the recent new highs and fundamentals still supportive, we’re optimistic that this bull market will be around a while longer.

Ryan Detrick is senior market strategist at LPL Financial.

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