Wall Street remains bullish: AI and earnings support the trend, a short-term pullback in US stocks presents a buying opportunity

Wall Street strategists maintain a bullish stance as U.S. stock valuations rise, believing that any recent pullback will create buying opportunities. Despite signs of excessive optimism in the market, strategists from HSBC, Morgan Stanley, and UBS continue to hold a long-term bullish outlook.

UBS's head of macro equity strategy, Aaron Nordvik, describes his view as "tactically cautious but structurally bullish," citing strong long-term trends in AI and a favorable regulatory outlook. Morgan Stanley's chief U.S. equity strategist, Michael Wilson, expects the S&P 500 index to reach as high as 7,200 points next year, an increase of about 13% from Monday's closing level.

Strategists believe that strong corporate earnings and economic data, clearer tariff policies, and the driving force of artificial intelligence will propel the stock market to continue rising next year. This long-term bullish outlook is noteworthy as investors face a series of upcoming events that could impact the market in the coming days.

The Federal Reserve's interest rate decision, earnings reports from the four "Mag7" stocks, and a wealth of economic data are set to be released. This combination of factors will shape market direction in the coming weeks.

Valuation Concerns and Market Signals Coexist

The S&P 500 index has risen 28% since its low on April 8, raising concerns about a market bubble. The index has set closing highs for six consecutive trading days as of Monday, and if it reaches a new high on Tuesday, it will mark the longest consecutive record since 2021.

This has pushed the benchmark U.S. stock index's price-to-earnings ratio to about 22 times based on projected earnings for the next 12 months, comparable to levels during the short-term peak in February. Last week, speculative stocks like Opendoor Technologies Inc. and Kohl's Corp. surged, further intensifying concerns about a market bubble.

The Chicago Board Options Exchange Volatility Index (VIX) has remained near a low of about 15 since February, which could be a contrarian signal indicating that traders are overly complacent.

Buy on Dips? Structural Positives Support Long-Term Outlook

Wilson warns of the risk of a recent pullback but simultaneously expresses a long-term optimistic view. He believes the market could easily see a 5% to 10% pullback this quarter, as tariffs will impact corporate balance sheets.

However, Wilson believes that any decline will be temporary and states that he would actively buy in such a scenario. He expects the S&P 500 index to reach as high as 7,200 points next year, an increase of about 13% from Monday's closing level.

HSBC's chief multi-asset strategist, Max Kettner, does not believe that this week's earnings reports or economic data will be weak enough to trigger a pullback. Although he thinks short-term sentiment and positioning show sell signals, particularly intraday and technical signals.

Nordvik states that caution is needed at the moment and that he will not increase long positions in stocks. But he emphasizes that he does not want to "miss the forest for the trees" by overly focusing on potential pitfalls, as the market remains in an upward trend. Strategists are building long-term bullish positions based on multiple structural factors: strong corporate earnings expectations, good economic data performance, clearer tariff policies, and the ongoing driving force of artificial intelligence technology.

Kettner stated:

"We believe that short-term sell signals need to be stronger to truly indicate a significant risk of a pullback."