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The stock market’s rally seems to have defied gravity, leaving bears waiting for something to cause a drop. At some point, they’ll have to give in and buy stocks. 

The

S&P 500

is up about 25% from its bear market low hit in early October. While it might be reasonable for the market to have rallied a little bit from that point, the extent of the rally has caught many off guard. Driving the gains has been the hope the Federal Reserve should end its interest rate hikes soon, as inflation continues to cool. The idea is when rates stabilize, the economy and corporate profits will do the same. But there’s near-term risk to earnings as the impact of higher interest rates happens on a delay.

Meanwhile, the market is now expensive, with the S&P 500 trading at just over 19 times forward earnings per share estimates. That’s up from about 15 times at the start of the rally—compared with how high interest rates are, it’s a historically high multiple. 

That’s why any number of events could have caused the market to pull back, such as the jump in Treasury yields that happened in the first week of July. In another example of something that typically would put the market under pressure, the federal-funds futures market still expects the Fed to raise rates one or two more times before it’s finished. A future possible drag on the market could be lackluster corporate outlooks during second-quarter earnings season. 

And yet, stocks have broadly powered higher, choosing to look past such headwinds. The market seems to be laser-focused on the eventual dip in interest rates and the boost that will give to profits. 

That means, at some point, those bearish on the market will have to “capitulate” and ditch their pessimistic views and opt to buy stocks. That point seems to be approaching: Evercore strategists wrote that roughly the 4560 level for the S&P 500 is where bears will become more bullish. The index is currently a touch above 4500. The 4560 level would be up just over 27% from the October low.

That gain would mirror something seen in the past. During the financial crisis, the S&P 500 rose just over 27% from a low point—only to fall back down to that low as it priced in the recession that was to come. So if the index hits 4560 and holds steady and doesn’t show much sign of cracking, bears will likely assume the market has moved on from recession fears—even if a mild one is on the way in the near-term. 

At that point, if bears can’t beat the market, maybe they’ll join it. 

Write to Jacob Sonenshine at [email protected]