Stock market bubble?Explaining why analysts are not concerned

Meanwhile, the U.S. Federal Reserve is expected to start cutting interest rates in June, which could further benefit high-growth tech stocks.

The size and narrow nature of the bull market has raised concerns about a market bubble, and UBS strategists on Wednesday drew comparisons to the late 1990s.

In January 1995, when the Federal Reserve ended a series of rate hikes that raised the federal funds rate to 6%, the S&P 500 began a bull market that returned more than 27% annually over the next five years.

Until the bubble spectacularly burst in March 2000.

Bhanu Baweja, chief strategist at UBS, and his team write, “The 1990s bull market had two phases: a broad and steady rally from early 1995 to mid-1998; “From the second half of 2000 to the beginning of 2000, the period was narrower and more explosive.” In research notes.

“Today’s sectoral patterns, narrowness and correlations resemble the second phase of the market, and valuations are not far off.”

But despite the surface-level similarities, Baweja maintains that “there is no bubble that’s going to burst anytime soon,” pointing to significant changes in earnings, realized profits, free cash flow, IPO and M&A activity, and signals from the options market. pointed out the difference.

While sector-specific enthusiasm is evident today, UBS emphasized that it is based on actual shareholder returns, rather than solely on hype, as was often the case during the dot-com bubble.

missing ingredients

TS Lombard highlighted in a research note on Monday that the top 10 companies in the S&P 500 index account for about 34% of the index’s market capitalization.

The research firm argued that this concentration was justified given the impressive returns of these companies.

“However, this means that it is difficult for the overall index to rise significantly without participation from the tech sector, and it also means that the index is vulnerable to risks specific to these companies.” said Skylar Montgomery Corning, Senior Global. Macro Strategist at TS Lombard.

However, the Fed’s dovish reorientation and solid economic growth in recent months has allowed stock market breadth to improve both by sector and region, with both European and Japanese indexes moving past record levels in recent weeks. The highest value was recorded.

Additionally, Montgomery Corning argued that the stock’s rise to date is justified by fundamentals: policy and growth prospects, as well as a strong fourth-quarter earnings season.

she Said For any stock market bubble to explode, three things are needed: a solid fundamental story, a compelling story for future growth, and liquidity and/or leverage. Montgomery Corning said that while an AI-driven bull market meets the first two criteria, the third one appears to be missing.

“Liquidity is still ample, but leverage has not reached worrying levels yet. In fact, liquidity has worsened somewhat since the beginning of last year (there is a risk that a Fed rate cut in 2024 will make the bubble even worse),” she said.

“However, leverage doesn’t seem to be a concern. Margin debt and options open interest suggest this is not a speculative rally. Margin debt is up slightly, but it remains at the highs of 2020. Far from it.”

The bad news?

UBS noted that the absence of a bubble does not necessarily mean the market will continue to rise, and Baweja noted that productivity growth is “not what it was in the 1990s.”

“Certainly, this could change, but today’s data on electronics and information technology orders, capital spending intentions, and actual capital spending does not suggest any capital deepening as productivity increases. ” he said.

“Our globalization indicators show that globalization has stalled (actually weakened) compared to its fastest growing period in the late 1990s. Today’s economies are in the late cycle. be.”

UBS believes the current economic structure is closest to that seen from the end of the 1990s bull market to the early 2000s, with real disposable income growth “weak and likely to weaken further.” . Baweja suggested that these variables need to start becoming more optimistic. For the bull market to continue.