Uptrend Faces a Test

Over the past week, U.S. stocks continued their strong performance, with the S&P 500 hitting record highs four times, coming within striking distance of the 6,500-point mark. The market broadly rallied across sectors. According to Dow Jones Market Data, healthcare, communication services, and consumer discretionary sectors led the gains. UnitedHealth surged over 10% in late trading due to Warren Buffett's investment, pushing the healthcare sector to a five-month high. In contrast, the consumer staples sector performed the worst, declining by 0.6%.

Since August, Wall Street has repeatedly raised its year-end targets for U.S. stocks, with Oppenheimer setting the highest forecast of 7,100 points for the S&P 500—nearly 12% above the latest closing level. Recently, Citigroup and UBS followed suit, citing better-than-expected U.S. economic and corporate performance. "Even though the worst-case scenario for tariffs has not yet materialized, confidence in fiscal support and a weaker dollar have mitigated the impact on earnings, spreads have narrowed, and fund flows remain supportive," UBS wrote in a report.

Over the past week, U.S. equity funds saw significant inflows as investors shifted away from selling positions on hopes of a potential Fed rate cut in September, while easing U.S.-China trade tensions further boosted market sentiment. Data provided by LSEG to First Financial showed that investors net purchased $8.77 billion in U.S. equity funds, partially offsetting the previous week's $13.89 billion outflow.

However, amid seasonal weakness, high valuations, a dim macroeconomic outlook, and tariff impacts, the recent rally has led some investors to question how long U.S. stocks can avoid a correction. Bank of America's latest fund manager survey revealed that about 91% of respondents believe U.S. stocks are currently overvalued—the highest proportion since 2001.

Charles Schwab noted in its market outlook that last week, the market digested a slew of economic data. The CPI was not as hot as many feared, and since the full impact of tariffs has yet to fully manifest at the consumer level, the market appears confident that the U.S. economy can absorb higher prices. Valuations may be high, but sentiment remains relatively strong, with dip buyers continuing to show enthusiasm.

The firm attributed recent market performance largely to the outperformance of large-cap stocks. The market has returned to a top-heavy state, but breadth is not weak: 61% of S&P 500 stocks are trading above their 50-day moving averages, while 60% are above their 200-day moving averages. However, as the S&P 500 hits new highs, only 24% of its components have outperformed the index over the past 60 days, indicating this remains a stock-picker's market. Looking ahead, if the index continues to rise without a notable improvement in breadth, concerns may grow—but for now, they haven't.