As investors weigh the evidence of whether or not the recent stock market rally is sustainable, it is important to consider all of the data points. Those bullish on the market argue that there are a number of factors indicating that this rally could last. These include the strong performance of small-cap stocks, signs that ETF buyers are becoming more cautious, and expanding market breadth according to the market research companies. While it is important to consider all of the evidence, making a decision now requires a high degree of conviction.

The most hotly contested topic amongst traders is the state of corporate earnings, which caused a ruckus throughout the year. This week, the news was unfavorable, with projections for future profits taking hits as companies reported their results.

Even though, founder and chief executive officer at 50 Park Investments, is feeling increasingly bullish, he cautions that this rally is still fragile. “I’m still sleeping with one eye open because just one or two big selloffs could easily negate all of this and lead us back into violent bear-market selling,” he said.

Stocks managed to eke out some gains this week, in spite of a host of disappointing corporate earnings and weak economic data from around the world. On Tuesday, the market saw more stocks rising than falling for the second time in three days, with the ratio of rising to falling stocks reaching 10-to-1. This kind of cluster of positive breadth indicators hasn’t been seen since May 2021.

Ned Davis Research has observed that double breadth thrusts tend to presage significant gains. Since 1950, the S&P 500 has risen more than twice its historic pace following such signals, jumping 10% six months later.

The double 10:1 up day supports the argument that the second-half rally is underway,” said, chief US strategist at Ned Davis who forecasts the S&P 500 to end the year at 4,400, about 11% higher than it is now. “How sustainable the rally is will likely depend on monetary policy and earnings, but technical indicators will likely provide the information before Fed officials or management teams.

Since reaching its 2022 low in mid-June, the S&P 500 has climbed 8%, reclaiming its 50-day moving average, a level widely watched by traders for an indication of momentum. At 36 days, this bounce is the first one this year that has lasted more than a month. As was the case with the last three recovery attempts, economically sensitive stocks such as automakers, retailers and chipmakers have led the way this time around. Of course, past endeavors didn’t end well, with all of them succumbing to fresh market lows.

One significant difference is the performance of small-cap stocks. While the Russell 2000 lagged behind the market previously, it is now edging ahead. According to Sam Stovall, chief investment strategist at investment research firm CFRA, small-caps have always outperformed coming out of bear markets since 1978.

Earnings expectations are deteriorating during this earnings season. After retaining optimism while stocks tumbled into a bear market in the first half of the year, analysts are now downgrading their estimates. Forecasts for 2023 earnings have declined for five consecutive weeks, though not by much. They are currently at $244 per share, according to data compiled by Bloomberg Intelligence.

The reset in earnings expectations is good because it suggests a capitulation that JPMorgan strategists including Marko Kolanovic say may prompt investors to seek an inflection point in the market.

Reasons for trepidation are plentiful. Signaling that the Fed’s policy may be effective as intended, expectations for future pricing pressure have lessened in the bond market.