Now the S&P 500's forward P/E is only 19.9 times, which is really not expensive — let me talk about my year-end target judgment

Let me first share a data point. Today I want to discuss it from the valuation perspective

The S&P 500's current forward P/E is 19.9 times, exactly at the 5-year average of 19.9 times (Chart 1), and only slightly higher than the 10-year average of 19.1 times. Looking at the chart, you can see this multiple has fallen from the high of 23 times in October last year to now, returning to near the historical average. It's not expensive, let alone a bubble.

The logic behind the recent decline has been explained many times — it's not a fundamental issue

Market breadth is actually improving, not a complete collapse. The proportion of stocks above their 10-day and 20-day moving averages is around 67% and 63% respectively. This phenomenon of the index falling while more underlying stocks rise constitutes a positive divergence, indicating the market is undergoing internal rotation of funds.

What truly triggered the technical breakdown are two mechanical market mechanisms.

First, the end-of-quarter rebalancing by pension funds and insurance companies. JPMorgan estimates that due to the imbalance between stocks and bonds, there will be approximately $165 billion in stock selling and bond buying flows at the end of the quarter. Stocks previously rose too much, compressing the equity risk premium to extremely low or even negative levels. For pension funds and life insurance companies that only seek to achieve fixed actuarial returns, holding risk-free government bonds is now more cost-effective than stocks. These institutions have large amounts of cash locked in private equity and private mortgages, forcing them to mechanically cash out the stock positions that can be liquidated in the public market.

Second, the Russell Index's annual rebalancing. As mentioned before, 42 small-cap stocks graduated to large-cap stocks due to a sharp price surge, triggering forced rebalancing by passive funds.

AI capital expenditure will not stop. The competition among tech giants is a battle for survival. Google, Amazon, and Meta are engaging in either defensive or offensive expansion where they either advance or retreat, and no major player will easily cut spending.

Inflation has also peaked. Oil and gasoline futures prices have fallen sharply, meaning the inflation hype is over. The new chairman taking office has brought a temporary increase in volatility, but there is no sign of liquidity panic or a full-scale rout in the market.

Sector rotation triggered by Apple's price increase

Apple recently raised prices across the board for Mac, iPad, smart home devices, and Vision Pro. Senior company executives publicly attributed this to the surge in memory and storage chip prices caused by the explosive demand from AI data centers, saying they had been absorbing costs as much as possible but have now reached a critical point where they have to pass costs on to consumers to protect gross margins.

This news triggered profit-taking in large-cap tech stocks, especially hardware, semiconductor, and memory sectors that directly benefit from AI capital expenditure. Nvidia, Broadcom, and Micron all felt the impact. Micron even fell 6% after its explosive earnings report.

But the funds selling large-cap stocks did not leave the market; they flowed heavily into the software sector and traditional defensive value sectors, such as Berkshire Hathaway, healthcare, and real estate. The S&P 500 and Russell 2000 ultimately ended nearly flat in the tug-of-war between large-cap declines and small/mid-cap gains, showing excellent market breadth with far more gainers than losers.

Signs of defensive rotation are evident: medical/pharmaceutical (led by Eli Lilly's surge), utilities, real estate, and other traditional defensive hard asset sectors top the gainers list, while semiconductors, large-cap tech, and memory-related sectors suffered severe sell-offs. Money has not left the market; it has just taken shelter in defensive sectors.

A few individual stocks worth noting from a technical perspective

Nvidia, as the largest weight in the market, is currently seeking support near the daily SMA200, which is around $190.

Micron's long-term fundamentals are sound. The gap below at $1087.50 is a good entry point. If it can hold and build a base above this level, it still has long-term doubling potential relative to peers.

Qualcomm fell to $185, a key left-side historical peak support level. If Monday shows a pattern of first breaking below and then recovering, and can reclaim $191, it would be an excellent bottom-buying opportunity with a favorable risk-reward ratio.

Robinhood performed exceptionally strong, gapping out of a months-long base, with potential to start a main uptrend. It is currently holding the daily EMA 20 at $93.9, with a chance to build a base here.

GLW Corning broke out, pulled back to the bull flag, and closed with a long lower shadow last week, with potential to challenge new highs again.

Other stocks like MRVL, INTC, AMD, COHR, NOK have also been shared many times. The overall judgment should still be based on the broader market.

Both sentiment and seasonality point to the same direction

The Fear & Greed Index has now officially entered extreme fear territory. Historically, extreme fear is a good buying opportunity. Historical statistics show that in the first half of July, the Nasdaq averages a 3.5% gain. After a brief consolidation, the market is likely to see a rebound in early July.

Polymarket's prediction market currently shows only a 10% probability of a recession, indicating the market's concerns about recession are very light.

Back to the core issue of valuation mentioned at the beginning

Now the S&P 500 forward P/E is 19.9 times, flat with the 5-year average, and only 0.8 times higher than the 10-year average. It's really not expensive.

Looking ahead, using the valuation channel drawn by multiplying forward EPS by different P/E multiples, the key levels corresponding to end-June are: 21 times → 7656, 22 times → 8021, 23 times → 8385.

The S&P 500's current earnings growth is as high as 29%, providing solid fundamental support. I firmly believe the market will reach 8000 points by year-end, even 8200. If the market can return to the 23 times P/E level of the 2025 high by year-end, based on this valuation channel, the market would reach 8385 points (Chart 2). Looking further ahead, the long-term target for the S&P 500 in 2027 could even be 9000-10000 points (Chart 3).

These are not random numbers; they are based on two premises: solid earnings growth and no deviation of valuation from historical averages. The current pullback is essentially a combination of end-of-quarter mechanical fund flows and sector rotation triggered by Apple's price increase, unrelated to whether valuations are reasonable or earnings are solid.

So I see 8200 by year-end, and a maximum of 9000-10000 next year. What we need to do now is to buy and hold long-term positions at dips. The AI logic has not been disproven, and I believe the inflection point for AI capital expenditure will appear around the end of next year. It's still too early now.

There will be another analysis later on what you need to know before next week's market open. For those interested, feel free to take a look.