6. We think chances are slim of additional tax cuts being enacted in the near future. President Trump is likely to propose a new round of cuts as part of his 2020 campaign. But even if Republicans win back the House of Representatives next year (which seems unlikely), it is unclear how much appetite for additional cuts there would be in Congress.

7. The rotation into value stocks could have additional room to run. Although value has been outperforming since late August, we think value still looks relatively inexpensive. This trend could continue, especially if economic momentum picks up further.

It’s harder to make a case for near-term optimism over stock prices

Since the end of the summer, investor sentiment has improved with receding recession fears, growing optimism over a U.S./China trade deal and better-than-expected earnings. Over the last month, strong inflows into equities have pushed prices and valuations higher.

The S&P 500 is now trading at a price-to-forward-earnings ratio of close to 18, which is well above its historic average.1 We don’t think this valuation level is egregious, given very low Treasury yields and subdued inflation, but stocks appear priced for relatively strong economic and earnings growth as well as notable improvements on trade.

In our view, economic activity and corporate earnings will likely improve modestly over the next year. And we are still relatively optimistic that some sort of trade deal between the U.S. and China will happen in the near future. But we struggle to make the case that conditions will improve to the extent implied by current stock prices.

This is particularly true given the current monetary policy backdrop. Conditions remain extremely accommodative and equity friendly, but the Federal Reserve seems unlikely to push interest rates any lower, unless it sees fresh evidence of economic weakness. And such evidence would be a bearish sign for stocks.

At this point, we think equity prices have gotten ahead of fundamentals. This doesn’t mean we are calling for a sharp pullback, let alone the end of the current bull market, but it does mean that stocks could be vulnerable to a near-term consolidation.

Robert C. Doll, CFA, is chief equity strategist and senior portfolio manager at Nuveen.

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