How High Can the Stock Market Go? Recession Talk Replaced by Rally Talk

The market has weathered almost everything that has been thrown its way. A trade war with China? Check. An inverted yield curve? Check. A slowing global economy? Check.

Yet, the economy keeps chugging along—the S&P 500 has already gained about 23% since the beginning of the year—and experts say its due for another rally to close out the year.

That’s the assessment of Andrew Slimmon, who works as a fund manager at Morgan Stanley. Slimmon told CNBC in an interview last week that he sees the S&P 500 rising by as much as 5% before 2020. Fellow markets prognosticators are saying such a rally is not far-fetched.

“I’m seeing a market that wants to go higher,” Michael Farr of D.C.-based Farr, Miller & Washington said. “The path of least resistance is to go up.”

Running the numbers, an increase of that size would take the index past 3,240.

“Investors pulled a lot of money out of equities in the first half of the year in anticipation that the economy was going to be very bad. The positioning was very defensive,” Slimmon told CNBC. “As money comes back into the market, which we’re starting to see, I think it will chase into the areas that are more cyclical, exposed to upside.”

While investors have been skiddish in the past with their capital— and with good reason; the economic data has been mixed and the trade concerns omnipresent—recent indicators, including a better-than-expected earnings season so far and a jobs report that exceeded analysts’ expectations by about 55,000 jobs, have experts saying investors can be optimistic about the market in the short term.

“I don’t see anything that could possibly disrupt this bull market,” said Todd Schoenberger of Wellington Insights.

Last week, news coming out of Washington of progress on an interim trade deal with China sent the Dow, S&P 500 and Nasdaq Composite all into record territory on Thursday. They’ve lost some ground since.

Progress, if there is any, is not likely to happen this month as both sides have much to hammer out. Yet, any semblance of a deal is likely to inspire confidence in investors, Schoenberger said.

Farr though differs. He told Fortune that the market is waiting for actual proof of a deal.

“If there is a real trade deal that’s going to calm those waters, then that $3.4 trillion”—referring to the amount tied up in money markets that could flow to equities—”will come surging in and take us up to a very high price-to-earnings multiple,” Farr said.

Most of that money may be directed into value stocks, which seem to be primed for big returns. Slimmon pointed to these stocks as being the potential drivers for an upturn because he thinks they have been well underpriced.

“Those value stocks are the big opportunity, and they’re starting to rally,” he said.

Investors seem to have been following suit, shifting away from volatile growth stocks to those with more stability. At one point last week, the Russell 100 Value index had gained over 1.8% across five successive sessions—about nine times higher than the Russell 100 Growth index’s .28% in the same span.

“If you buy into the idea that you buy low and sell high, then everything is already high and there’s nothing low around to buy except for these value stocks,” Farr said.

Schoenberger sees the market remaining unchanged until at least after the first few months of 2020, noting that a stock dump at the end of the year would pose a good buying opportunity for the average investor.

“Where we are with the economy, in the markets, I don’t see that shifting in the first quarter of next year,” Schoenberger said. “So if we do have a selloff, take advantage of it.”

But the threats to a recession are still apparent despite the reduced headwinds. Some economists are still expecting one—it’s just the nature of where the economy is at in this cycle—but all of the recent supporting data seem to have prolonged any coming recession by at least a few months, they say.

“Despite a list of very sound reasons that each represent a significant headwind to the market, the market has ticked higher. So for all the fears we’ve been hearing for the past year, the market has gained,” Farr said.