As the outlook for the broad capitalization-weighted indices in the US is clouded by higher interest rates and extended valuations, it is a suitable time to look for opportunities under the market surface. The following section from “New bull market or a bear market bounce?” summarizes the situation facing investors.
New Bull Market or Bear Market Bounce?
The fundamental and technical signs point to the broad US stock market nearing a short-term peak. Technically, the head and shoulders neckline from the topping process looms large. From a fundamental perspective, valuations remain extended in relation to the historical evidence and near-term earnings growth.
In terms of opportunities in the broad stock market, valuation compression remains the primary risk. This is supported by the outlook for higher long-term rates and the current earnings contraction in the Nasdaq 100.
As a result, the relative opportunities in the stock market reside in those segments and sectors which are trading at discounted valuations. These opportunities are prevalent in the small to mid-cap value segments of the US market and stretch into the large-cap segment.
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