Some of the factors that Paulsen sees contributing to a constructive outlook include monetary and fiscal stimulus, more reasonable stock valuations and low inflation, particularly at the gas pump.
“I don’t think it’s going to keep up the pace it’s going. I wouldn’t be surprised at a healthy pullback that scares people again,” he said of the broader market. “But I just think the fundamentals are there, with a better market valuation, much more competitive yields, much more fiscal and monetary support, and a gut-check in sentiment.”
The obstacles remain, though.
For one, corporate America could be heading into its first negative earnings quarter since the second quarter of 2016. Multiple expansion, which helped propel most of the bull market run, is likely over, meaning companies are going to have to start growing revenue.
Investors will be hoping that a stronger economy can help make up for earnings weakness.
“Although the peak earnings growth rate for this economic expansion is almost certainly behind us, profit growth peaks have historically been followed by several years of economic growth and stock market gains,” John Lynch, chief investment strategist at LPL Financial, said in a note. “We believe the earnings outlook is strong enough to support solid gains for stocks over the balance of 2019” and the firm is sticking to its 3,000 price target for the S&P 500, implying 9.3 percent upside from Thursday’s close. The median price target on Wall Street this year is 2,950, or about 7.5 percent higher.
Lindsey Bell, investment strategist at CFRA, thinks the markets and earnings picture will need a boost from geopolitics, namely a positive resolution to the U.S.-China trade talks.
“A reduction in tariffs or a better-than-expected trade deal with China could quickly push the market higher because it would result in much better-than-expected economic and earnings growth around the globe,” she wrote. “A worse-than-expected outcome would likely push the market lower as growth expectations continue to be ratcheted lower.”
But Paulsen cautioned about the implications of the tariff talks.
President Donald Trump has been pushing for a reduction in the U.S. trade deficit, which was $49.3 billion in October. But Paulsen said reductions in imports have traditionally come with a weakening economy and a down stock market.
That highlights just one of the obstacles for investors late to the market rally.
“If you’ve been in cash and you want to throw it all in, I certainly wouldn’t do that,” Paulsen said. “But I think it’s OK to be overtilted to the positive side.”