Traders increase bets on falling stocks as S&P 500 approaches new bull market

The S&P 500 (^GSPC) is almost in a bull market. But that doesn’t mean everyone is clinging to the index to climb higher.

Data from the CFTC’s Commitments of Traders report compiled by Bespoke shows that S&P 500 futures are 17.4% short. This is the worst reading since September 2007.

The S&P 500 hasn’t taken this long to reach a bull market since 1957-1958, per Bespoke. And the slow upward progression has strategists increasingly mixed on what comes next.

There are people who say the scale of the rally, or lack thereof, is concerning.

“While there are undoubtedly individual stocks that will deliver accelerated growth in AI spending this year, we don’t believe this will be enough to change the trajectory of the overall cyclical earnings trend significantly as the figure business is slowing and cost pressures remain sticky,” Morgan Stanley chief investment officer Mike Wilson wrote in a note to clients on Monday.

Investors haven't bet so much on a decline in the S&P 500 since 2007.

Investors haven’t bet so much on a decline in the S&P 500 since 2007.

Strategists like Wilson point to the lagging impact of tighter Fed policy and the potential for lower second-half earnings. But there are also growing reasons for the bulls to hold out until the end of 2023.

To officially rise 20% from its October low and enter a bull market, the S&P 500 must hit 4,292.44. Four strategists closely tracked by Yahoo Finance have raised their price target in the past week alone. The newest is BMO Capital Markets Chief Investment Strategist Brian Belski.

“Over the past five months of the year, it has become increasingly clear to us that stock market resilience is here to stay,” Belski wrote in a note on Monday. a host of uncertainties the market faced going into 2023, but it looks like all the doom and gloom that many others were predicting has yet to come to fruition.

Artificial intelligence has been the driving force behind the recent uptrend in stocks. Nvidia (NVDA), the fourth most weighted stock in the S&P 500, has seen its shares soar about 35% in the past month after projecting higher-than-expected earnings in the quarter due to demand for AI. Shares of Microsoft (MSFT), Google (GOOGL) and Meta (META) have all risen significantly this year as well. Even Tesla (TSLA), which has seen its stock price soar for various reasons, is considered by some to be a game of artificial intelligence.

While the race was important, not all of Wall Street has called it off yet, either.

“The AI ​​hype around the tech sector is real and likely to propel future growth for many stocks in the space,” Belski wrote. “So, despite extremely strong sector performance (year-to-date), we think the momentum, even if it’s slowing down a bit, is likely to persist for the foreseeable future.”

Julian Emmanuel, who leads Evercore ISI’s equity and portfolio strategy, believes we’ve entered a “dynamic market” driven by the rise of AI. That means things will be volatile, according to Emmanuel. Perhaps indicating those betting against the S&P 500 at a historic rate might be right after all.

Or maybe Emmanuel, who raised his annual price target on the S&P 500 from 4,150 to 4,450 on Sunday, will be right at the end of the year. Either way, the march to the next bull market could be bumpy.

“Remember to ‘check your emotions at the door,’ because it’s likely to be a roller coaster ride – exciting at times, terrifying at others,” Emmanuel wrote. “That’s how ‘dynamic markets’ work. And emotions are, and always will be, the biggest drag on long-term investment returns.”

Josh is a reporter for Yahoo Finance.

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