A top Wall Street analyst lays out 5 reasons why stocks can climb another 5% before year-end, even in a choppy market

• Stocks are enjoying a summer melt-up, but the S&P 500 can swing another 5% higher by year-end for a few key reasons, Chris Harvey — the head of equity strategy at Wells Fargo — said in a note.
• Lowered earnings expectations supported the "less-bad" for stocks, as well as slowing coronavirus case growth, has lifted a key pressure on stock valuations, Harvey said.
• The Federal Reserve's rate cuts and corporate bond-buying raised the relative value of equities, Wells Fargo added, as credit spreads tightened and Treasury yields tumbled.
• Lastly, investors are more often viewing valuation as "a cute-but-antiquated metric when selecting stocks," according to the bank's analysts. A diminishing regard for equities lofty prices removes a barrier for the market to jump higher.
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Wells Fargo's projection for a summer stock-market melt-up is "well underway," and prices can rally another 5% before investors should grow concerned, according to Chris Harvey, the firm's head of equity strategy.

Harvey laid out the terms for a near-term rally at the start of the summer, expecting earnings season and economic recovery to boost prices. The S&P 500 has since neared Wells Fargo's year-end target of 3,388 and can continue soaring for a handful of reasons, he said.

The most recent boon to stock investors' portfolios has been a largely positive earnings season. While profits dove across industries from their year-ago levels, Wall Street estimates were similarly low. Earnings generally supported "the 'less-bad' story" in stocks and led valuations higher, the team wrote.

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Bullish investors have also focused on slowing coronavirus spread as a sign of gains to come. Though infection rates swung higher at the start of the summer as states reopened, that negative indicator has since decelerated. Stocks can maintain their melt-up if the COVID landscape continues to improve.

The Federal Reserve pushed interest rates close to zero in mid-March as part of its initial padding against the pandemic's economic fallout. Yet the policy is still helping stocks by diminishing the appeal of bonds. Yields continue to sink as investors seek safe haven. While Treasurys are a historically stable asset, their high prices leave investors with yet another reason to stick to equities, Wells Fargo said.

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The Fed's intervention extends to the corporate credit market. The central bank boosted credit market health in late March after announcing its unprecedented move into corporate bond-buying. Since then, credit spreads between Treasurys and corporate debt have grown relatively tight, leaving investors with fewer reasons to buy up the fixed-income assets.

Lastly, Wells Fargo sees stocks' expensive valuations mattering less and less to market participants. In a trend similar to that seen during the late-1990s tech bubble, investors are starting to view stock prices as "a cute-but-antiquated metric" for picking equities, the firm wrote. Removing lofty prices from the equation erases a significant hurdle for the market to rally even further.

Read more: Jason Tauber is crushing the market this year by finding the tech companies enabling the biggest disruptions. He told us how he's adjusting his game plan as valuations soar — and 7 of his top picks today.

Still, the melt-up can only last so long. Investors should ride the wave of market optimism while it lasts but prepare for opportunities elsewhere once equities' surge slows, Wells Fargo said.

"We want you to 'enjoy the ride while it lasts,' but if our melt-up forecast is right we expect improved risk/rewards for low-vol and bond proxies and less stable markets," Harvey wrote.

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