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Which Way Do U.S. Stock Markets Go From Here?

U.S. stock markets have been on a tear since the Brexit panic quickly subsided. How much longer can they keep it up? One look at the S&P 500 chart gives plenty of reason for optimism.

So much for the Brexit panic!

Just two weeks removed from Great Britain’s surprising—and supposedly catastrophic—decision to leave the European Union, U.S. stock markets have more than recovered. They’re soaring.

Yes, the initial panic from the Brexit knocked U.S. stock markets back a bit. In the two days following the vote, the S&P 500, Dow Jones Industrial and Nasdaq declined between 4.6% and 6.4%. Here’s what each index has done in the two weeks since:

S&P 500: +6.8%, breaking through 19-month resistance (!) at 2,130 to reach a new all-time high

Dow Jones: +6.3%

Nasdaq: +7.3%

U.S. markets aren’t alone in their post-Brexit rally. The London Stock Exchange—in theory the epicenter of Brexit panic—is up 15% in the last two weeks. The Shanghai Stock Exchange is up 5.3%. The Nikkei 225 is up 4.8%. And so on.

So what happens now?

If you’re a value investor, you might be skeptical of how high U.S. stock markets have risen, particularly the S&P 500 now that it’s in uncharted territory. The index’s current price-to-earnings ratio is 24.8, its highest point since November 2009. The forward P/E is equally tenuous—at 16.6, it’s well above its five-year (14.6) and 10-year (14.3) averages.

However, if technical analysis is your thing—as it is for many of our analysts here at Cabot—then you let the chart do the talking. Here’s what a two-year chart of the S&P 500 looks like.

SPX Chart

Note the break above 2,130 resistance, a level the index hasn’t been able to breach since touching it in May 2015. The last time the S&P 500 left its 50- and 200-day moving averages this far in the dust, in November 2014, it kept ticking higher for another six months (with a few bumps along the way). The big correction didn’t arrive until August 2015, nearly 10 months after the initial breakout.
Having shed such long-term resistance following Brexit—“the final shakeout in a 19-month consolidation,” according to our growth investing expert Mike Cintolo—the S&P may well continue on its merry way to even greater heights. A lot will depend on second-quarter earnings season, which got underway this week and really picks up steam next week.

Those haven’t gone so well for large-cap companies of late. Companies in the S&P 500 have reported four consecutive quarters of year-over-year profit declines, and are collectively forecasting another 5.6% decline in Q2, according to FactSet. It may take a much smaller decline than that to keep this rally going. Or perhaps even positive growth—five consecutive quarters of negative earnings growth would be a post-recession first.

But here’s the thing: no one truly knows where this market is going. Two weeks ago, it was all gloom and doom, with market analysts on both sides of The Pond predicting weeks and perhaps months of pain for investors. For U.S. stock markets, it lasted all of two trading sessions.

True, the Brexit mess is far from over—in reality, Britain’s exit from the E.U. hasn’t even begun. Philip Hammond, the U.K.’s foreign secretary, says the secession could take as long as six years. No one really knows what impact it might have on the global economy—and global stock markets—once the ties are cut.

For now, the best thing you can do with Brexit as an investor is ignore it. Clearly, it’s what most investors are doing, as there are scarcely any sellers to be found. That can change on a dime, especially with a few high-profile earnings misses over the next few weeks. Until that happens, this is a great time to invest. Most of our advisories are recommending being heavily invested in stocks—Cabot Growth Investor, for instance, is down to just 19% in cash—and you should too.

Don’t focus on what could happen to U.S. stock markets a week, a month or a year from now. Pay attention to what’s actually happening. And right now, the market is flourishing.

Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week.