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Stocks have had a great year, seemingly against all odds. The question is whether investors should continue to take their chances for more profit.

However, the market chose to focus on the positives, such as expectations that the Fed will eventually cut interest rates, signs of cooling inflation and relatively strong employment numbers despite high-profile layoffs. The S&P 500 has jumped more than 9% this year, while the Nasdaq Composite’s gain is approaching 22%.

That has left many cautious investors in fear of FOMO, or missing out, said Manish Kabra, head of U.S. equity strategy at Société Générale, including his own firm. He notes that his core allocations favor categories that have lagged behind stocks, such as bonds and commodities.

Still, there’s reason not to chase the rally, he writes, “because the growing arguments can still be defused.”

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First, while many companies beat earnings expectations this season, that was due in no small part to lower expectations heading into the quarter, he writes. And while it’s true that stocks have outperformed other asset classes, that growth has come from a very small group of winners. That makes the stock market particularly vulnerable if those top performers stall.

Another reason not to jump. stocks look expensive when evaluated based on a number of criteria such as price-to-earnings, price-to-book value, and price-to-sales. In fact, the rally in stocks means the market has outperformed even the opposing bulls, who have positioned themselves for a market recovery from the second half of 2022.

Cabra also says the impact of the Fed’s tightening regime will continue even if the market takes a break, as the impact on the economy lags behind central bank action.

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If anything, he says, investors should hope that inflation will pick up sooner rather than later. That would open up more than just a small portion of the stock’s chance of resuming gains;

That leads him to advise investors to “don’t sweat the rally. The S&P 500 is likely to remain in the 3,500-4,200 range before credit risks and bond volatility rise again.”

Cabra isn’t the only voice arguing that the rally looks unsustainable. While some analysts seem to have eased concerns about whether a recession will ever come, other strategists also say there’s reason to believe the market will largely tread water in a strong first and second quarter. after quarters. showing

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That said, the market has defied bearish expectations for nearly six months, and could continue to punish skeptics if that trend continues. However, the path to doing so seems increasingly impassable for some.

Email Teresa Rivas at teresa.rivas@barrons.com

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