© Reuters. While pullback risks are growing, RBC is bullish on stocks going into 2024

The faces an increased risk of a short-term pullback, according to analysts at RBC Capital Markets.

Bullish sentiment and positioning, coupled with peak US valuations relative to Europe, contribute to this risk.

Analysts note that a net bullishness indicator using a four-week average is over one standard deviation above its long-term average, historically resulting in a flat S&P 500 over the next three months. Asset manager positioning in S&P 500 futures is also nearing recent peaks.

“While we remain constructive on the year ahead, several charts that we track regularly in Pulse are starting to suggest that the rally in the S&P 500 is due for a pause,” the analysts said in a note.

US valuations, reaching peaks relative to Europe, coincide with growing concerns among non-US investors about the 2024 presidential elections, potentially prompting profit-taking in US stocks early next year.

Inflows to US equities may be stalling, while outflows from growth funds contribute to weakness.

Despite potential short-term challenges, RBC sees the S&P 500 ending the year at a reasonable level.

“What this model is telling us about 2024 has been a big topic of conversation in our recent investor meetings. Currently, it’s calling for a trailing P/E at YE 2024 of 23x, or around 5,300 when used in tandem with our 2024 EPS forecast of $232,” the analysts added.

“For now, the key things to know are that it is telling us that the stock market is likely to end 2023 at a valuation level that is reasonable in the context of the moderation in inflation that we’ve seen, and that we should look additional gains in 2024 as inflation continues to ease and interest rates come down a bit.”