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Why the S&P 500 is struggling to stay past 2,000

Last month, the S&P 500 finally breached the 2,000 level. Since then, however, the U.S. stock index has been struggling to stay at that level

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The S&P 500 last month finally breached the 2,000 level, but the U.S. index has since struggled to stay at that level.

On Monday, the S&P 500 hovered under 2,000 for most of the day. Some technical analysts have wondered whether the index’s inability to stay past 2,000 means a pullback is on the way.

John Higgins, chief markets economist at Capital Economics, is doubtful.

‘Those expecting a major pullback on the basis that valuations and profit margins are well above their long-run averages are also likely to be disappointed,” he said. “We expect the index to fall only a little further from here and are sticking with our end-2014 forecast of 1,950. What’s more, we expect the stock market to grind higher again next year.”

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Pullback concerns around U.S. stocks have been a constant theme this summer, given that many stocks have valuations hitting multi-year highs. There are also worries about how much of an impact the U.S. Federal Reserve will have on the stock market when it concludes its quantitative-easing program, which many analysts expect will occur in October.

Mr. Higgins, however, says concerns around the end of QE and even an interest rate hike next year are overblown.

“The first reason we are relatively sanguine about the outlook is that the market has tended to shrug off both the prospect, and the onset, of higher interest rates in the past,” he said. “The S&P 500 rose by an average of nearly 5% in the six months before the first rate hike in each of the last seven major tightening cycles.”

Another concern is centered on record profit margins. In the past, when profit margins have peaked, valuations tended to decline in subsequent years. Mr. Higgins, again, does not see this as justifying a stock-market decline soon.

“While a cyclical decline in margins is certainly overdue, much of the increase in margins that we have seen since the turn of the century is structural and stems from the growing internationalisation of Corporate America,” he said. “As such, it is unlikely to be unwound in full any time soon.”

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