Markets

S&P 500 could pop another 15% on top of recent new highs, says closely followed strategist

Key Points
  • "The second driver for this rally in the second half of the year" could be better earnings, in addition to continued economic strength, says Jim Paulsen.
  • The earnings recession that many had feared at the beginning of the year did not and likely won't materialize, he contends.
  • The 3,400 level on the S&P 500 could be a real possibility, he says. That would represent a 15% advance from Friday's record finish.
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Wall Street veteran Jim Paulsen believes stocks could continue to surge well past their recent recovery to the all-time highs that were last seen before the late-2018 market collapse.

"The second driver for this rally in the second half of the year" could be "better earnings" in addition to continued strength in the economy, the chief investment strategist at Leuthold Group told CNBC on Monday, following the 's fresh all-time closing high Friday. The index Tuesday logged its first record since September. So far in 2019, the index was up more than 10%, including a new intraday high Monday.

Paulsen characterized corporate earnings for the first three months of 2019 as "much better than feared," pointing out the earnings recession that many were concerned about at the beginning of the year did not and likely won't materialize. With first-quarter earnings season about halfway done, 77% of companies beat those lower expectations, 6% met and 17% missed.

"As we get into summer and start reporting second-quarter earnings, we'll have not ... 'much better than feared' but maybe just good, better earnings," argued Paulsen, saying 3,400 on the S&P 500 could be a real possibility. That would represent a 15% advance from Friday's record finish and a whopping 44% premium to the index's bruising low on Christmas Eve.

Last Monday, Paulsen put out a note that argued the market's so-called Worry Gauge shows that, despite this year's strength, investors remain really scared. And, perhaps counterintuitively, that could drive stocks higher.

Looking at stocks' forward performance since 1970, when the Worry Gauge was in the top quintile, as it is now, the S&P 500 pulled off an 18.48% annualized return within three months, or 4.33% nonannualized, Paulsen wrote. What's more, there has only been a 25% chance of a loss within 13 weeks, he added.

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