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TheStreet Open House

Should investors be nervous as the S&P 500 hits a record high?

By Chris Lau for Kapitall.

The second quarter—the first half of the trading year—ended on a high note. The S&P 500 hit a record high, leaving bearish short sellers with bigger paper losses. Helped by persistently low interest rates, lack of fear and leadership from various sectors, why are few investors nervous about a selloff?

Leadership

The financial sector helped boost confidence for the markets, though there are exceptions. Bank of America (BAC) and Citigroup (C) are underperforming the financial sector. The two companies are trading below the Financial Select Sector SPDR (XLF) ETF.

When lending terms are easy, banks tend to do well. If financials start to weaken, it may be a warning for investors that profit taking is ahead.

Strong tech sector

Microsoft (MSFT) and Apple (AAPL) provided the markets with strong leadership.

Microsoft closed its Nokia devices acquisition this year, while Apple shares made a new yearly high recently. Apple’s profitability continues to awe the market. It acquired Beats, a maker of headphones, signaling the firm is willing to make big acquisitions to bolster its business in audio hardware and music streaming.

Microsoft continued its steady growth in profitability. Lagging Windows sales failed to hold down shares. Investors are finally appreciating that Windows generates strong cash flow from its software sales.

Possible risks

Tension in Russia could hurt the positive sentiment. Ongoing weakness in China’s growth could limit upside in the markets. Both risks are macroeconomic variables that are difficult to forecast. For now, investors should stick with strong companies that have reasonable valuations. The ongoing rise in stock prices is raising risks for investors.

Companies that fail to match growth expectations to their valuations will correct to the downside. The widening disconnection between those two variables should start making investors nervous as the market enters the third quarter.

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