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Louis Krauskopf
NEW YORK (Reuters) – Some market participants believe the relentless rally in U.S. stocks is poised for a respite, although it remains unclear whether there is a bubble or a strong bull market.
The benchmark S&P 500 index has risen more than 25% in the past five months, a phenomenon that has only happened 10 times since the 1930s, according to BofA Global Research. Led by chipmaker Nvidia’s stunning rally, the S&P has already hit 16 all-time highs this year, the most in a first quarter since 1945, according to data from CFRA Research. .
Bullish investors argue that these gains stem from strong fundamentals rather than the rampant speculation associated with past bubbles. Commonly cited reasons include a strong U.S. economy, expectations that the Federal Reserve will cut interest rates this year, and excitement about the business potential of artificial intelligence.
But some investors believe the market’s near-constant rally means a pullback is coming. The last time the S&P 500 fell more than 5% was in October, but historically such declines have occurred an average of three times a year, according to BofA data. The index is up 8.5% since the beginning of the year.
“A lot of good news is priced into the market,” said Michael Alone, chief investment strategist at State Street Global Advisors. “From my perspective, that just suggests that the risk is skewed to the downside.”
It’s not immediately clear what could cause the market to fall. Higher-than-expected inflation has dampened expectations about how deep the Fed will cut interest rates this year, but many believe borrowing costs are still on the decline. Rising consumer prices are also seen as evidence of economic strength.
Investors have largely ignored other concerns, from instability at some U.S. regional banks to China’s lackluster economy.
Nevertheless, some indicators are flashing warnings. The weekly relative strength index (RSI) for the S&P 500, which measures whether stocks are overbought or oversold, rose to just above 76, a level it hasn’t surpassed since 2000, according to Miller Tabak data. There were hardly any.
The last two times the index rose above that level, there were significant declines. The 10% decline in the S&P 500 index in January 2018 and the 30% decline in January 2020 after the index surpassed that level with the emergence of COVID-19.
“None of this means we’re looking at a big ceiling over the long term,” said Matt Maley, chief market strategist at Miller Tabak. “But this shows us that we are ripe for a significant setback.”
Rising investor optimism is also causing concern. In the latest weekly survey from the American Association of Individual Investors, the percentage of investors who expressed a bullish view on stocks’ outlook for the next six months rose to 51.7%, marking the first time in the past three years that the level of bullishness has exceeded 50%. This is the 4th time in the area. .
High optimism is often seen as a contrarian indicator because it means the bar for positive surprise is high.
“The current economic backdrop makes the market more susceptible to a downturn,” said Kevin Gordon, senior investment strategist at Charles Schwab.
History shows that current progress may be gearing up for a pause. The S&P 500 hit a record high on January 19, erasing losses from the previous bear market and has since risen about 7%.
This is consistent with past bull markets, where stocks continued to rise even after hitting new highs. But such moves were followed by declines of at least 5% on 12 occasions when such situations occurred, said Sam Stovall, chief investment strategist at CFRA.
But is it a bubble?
For some, market optimism is coupled with parabolic movements in the stock prices of Nvidia and other AI-focused companies, the meme stock rally of 2021 and the dot-com surge of 1999.
Nvidia’s stock is up more than 80% this year after tripling in 2023, making it the third most valuable U.S. company. Other AI stocks have also posted significant gains since the beginning of the year, including Super Micro Computer, which has soared 300% and is set to enter the S&P 500.
JPMorgan strategists write that NVIDIA shows a strong relationship with the performance of the S&P 500.
“We caution investors that this relationship is likely to reverse once the AI hype peaks,” the strategists wrote.
However, some people note the differences from past bubbles.
Keith Lerner, co-chief investment officer at Trust, said the S&P 500 technology sector’s three-year outperformance amounts to about 30% versus the broader S&P 500 index.
That’s roughly in line with the average over the past 30 years and far from the peak of just over 250% in March 2000, Lerner said.
And there appears to be little sign of euphoria in the new issue market, where initial public offerings have been relatively muted.
According to Nicholas Colas, co-founder of Datatrek Research, 311 companies IPOed in 2023, compared to 311 companies in 2021, before the S&P 500 peaked in January 2022. Only 54 companies did so.
“Equity sentiment has been on the rise since mid-2023… but it’s nowhere near the bullish levels of historic market peaks,” said Savita Subramanian, equity and quantitative strategist at BofA Global Research. The bank recently raised its year-end target for the S&P 500 to 5,400 from 5,100. The index closed at 5,175.27 on Tuesday.
“The way we see it, this bull market has legs,” she said.
(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and Richard Chang)
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