The major equity indices are building on breakout that took place two weeks ago. This comes amidst already-high valuation multiples and near-record equity allocation by US households. However, with the 2Q earnings reporting season about to get underway, investor sentiment is yet to hit giddy territory.

A couple of weeks ago, after consolidating around 2100 for six successive weeks, the Russell 2000 finally broke through. The level has proven to be an important level for both bulls and bears going back to 2021; just above also lies trendline resistance from 25 November last year when a new all-time high of 2466 edged past the prior high of 2459 from November 2021.

Last week, the small cap index added 3.5 percent to 2249, building on the 2100 breakout. As things stand, bids are showing up at a rising trendline from April’s low when the Russell 2000 bottomed at 1733, down 29.7 percent from last November’s peak (Chart 1).

The index is now above both its 50- and 200-day moving averages (respectively 2083 and 2176), with immediate resistance at 2300.

Unlike the Russell 2000 which remains 9.7 percent from its all-time high from last November, large-cap indices such as the Nasdaq 100 have broken out to new highs.

The tech-heavy index began to struggle at 22100s beginning last December, although it reached an intraday high of 22223 on 19 February (Chart 2). The subsequent drop brought it all the way down to 16542 by 7 April. The vicious rally that followed once again stalled at 22100s in the second week of June. Tech bulls kept up the pressure, with the resistance finally yielding seven sessions ago.

Last week, the Nasdaq 100 rallied 1.5 percent to 22867. A successful breakout retest would be ideal, but last Tuesday’s low of 22388 was as close as it got.

Things are proceeding similarly on the other major large cap index, the S&P 500. It hit 6100 last December but was unable to penetrate it. The index kept hammering on 6100s for five consecutive weeks, with an all-time high of 6147 on 19 February, but only to then come under massive pressure and bottom at 4835 on 7 April (Chart 3). Soon followed a sustained recovery. Two weeks ago, bears could no longer hold off the bulls’ momentum, as the index broke out five sessions ago.

For whatever it is worth, a golden cross, which potentially signals more upward move, developed on the S&P 500 last week, with the 50-day at 5888 and the 200-day at 5843. A similar crossover formed on the Nasdaq 100 in early June. Current momentum is strong, but a successful breakout retest would be ideal.

Multiples not surprisingly are elevated. The S&P 500 just recorded its fresh highs, even as earnings estimates keep heading lower. As of 27 June, operating earnings estimates for the constituent companies were $255.29 for this year, down from $266.39 at the end of the March quarter and a high of $277.86 last July. Similarly, 2026 estimates were $310.02 in January, but only to be gradually revised lower to end the June quarter at $295.32.

On ’26 earnings, the S&P 500 currently trades at 21.3x, which, although on a downward trend, is expensive (Chart 4). Further, given the downward revision trend in earnings, there is no guarantee that these companies are going to hit the forecast earnings. The sell-side is notorious for starting out optimistic in its forecast and then lower the numbers as the year progresses.

Things are also stretched from the point of view of equity allocation. During the March quarter, households’ equity allocation was 38.8 percent, just a touch lower from the December quarter’s record 39.7 percent (Chart 5). This is in line with the 4.6-percent drop in the S&P 500 in the first quarter. Although in the second quarter, it shot back up 10.6 percent.

The Federal Reserve’s Z.1 report comes with a lag, with the March quarter having been reported on the 12^th last month, but when the June quarter gets reported in the next couple of months, it is probable the equity allocation would have hit a new high.

These are yellow flags from a mid- to long-term perspective. Near-term can be different. Arguably, investor sentiment is not terribly stretched just yet.

As of last Tuesday, Investors Intelligence bulls hit 51 percent – a first 50-plus reading in six months. As a matter of fact, the metric jumped 12.2 percentage points week-over-week in the latest week – the most ever going back to January 1990 (Chart 6).

Historically, sentiment tends to peak at 60-plus percent – or a series of such weekly readings. This is what the bulls will be aiming to achieve. Momentum is with them, and the earnings bar is low for the June quarter. S&P 500 companies are expected to bring home $62.02 for 2Q, versus $64.94 at the end of the March quarter and a high of $68.51 last September.

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