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S&P 500 Looks Like a Tiring Bull -- What's Next for U.S. Markets?

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It's OK. You don't have to put your money under the mattress.

But some on Wall Street are starting to warn the S&P 500 is getting a little too hot for there to be any substantial upside from here. 

"U.S. equity valuations are rich," a press person for M + Funds said in an email. JPMorgan Asset Management Global Market Strategist Jasslyn Yeo told CNBC Thursday, "We think there could be a risk that (earnings) would head downward." Meanwhile, U.S. stocks have roared for the first seven months of the year. 

Here's where the market is, and where company fundamentals are. 

The S&P 500 is up 19.8% year-to-date, while the average annual return on the index is roughly 7% or 8%, depending on the time frame one looks at. 

The average one-year forward price-to-earnings multiple on the S&P 500 is roughly 17, higher than the trailing 10-year multiple of 14.8. Meanwhile, the expected earnings growth rate for companies on the index is only 2.3%, according to data from FactSet. As the multiple expands and expected earnings growth stays muted, being in stocks becomes increasingly risky. That is unless, of course, a given investor sees drastic upside to earnings. 

Related.How to Protect Your Portfolio If There's No Trade Deal With China

But profit margins also remain compressed, as tariffs on Chinese goods have raised the price of imported goods, putting pressure on U.S. companies' gross margins. This margin compression has flowed through to the bottom line as the average net profit margin was around 11.3% in the second quarter of 2019,  down from 12% in the third quarter of 2018. Some think the U.S. and China will soon work out a deal, and the two sides are set to meet next week, but untangling the trade conflict web may take some time. 

Meanwhile, the 10-year treasury yield has risen to 2.08% in the past few days, while the Federal Reserve has strongly indicated several times it intends to cut rates by the end of July, suggesting there may be some near-term upside in treasury prices. 

One positive for stocks would indeed be those rate cuts.

"With interest rates down substantially, an upward adjustment to valuations more than offsets the decline in expected earnings growth," Brad McMillan, chief investment officer for Commonwealth Financial Network said in emailed remarks. "As long as rates remain low, we can expect current valuation levels to hold, leaving the market supported at current levels." Still, stocks have risen on falling interest rates, although it's possible there is some juice left in the current bull run. 

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S&P 500 Looks Like a Tiring Bull -- What's Next for U.S. Markets?

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