This was the month when the crowd decisively changed from fighting the bull to embracing it. The persistence of stock gains, with the S&P 500 up for 16 of 18 weeks and refusing to succumb to an expected seasonal slump in late February, has turned cautious. It is becoming increasingly difficult to resist extreme stock price fluctuations that capitalize on long-term AI and anti-obesity trends. And of course, unrestrained U.S. economic expansion, an unflinching appetite for corporate credit, and better-than-expected earnings growth make it difficult to get out of this bull market. It's not fun just watching other people having fun. Call this the “belief” phase of a bull market. Most participants agree with the general positive price action and basic storyline, making them more willing to tolerate rising equity exposure. For Goldman Sachs strategic trading guru Scott Rabner, the short-term consequences are simply incredible. “U.S. stocks are on a high, but it's proving impossible to call them all-time highs,” he told clients last week. They are raising their year-end price target every day.” . ” Of course, recognizing euphoria is both an art and a science, and euphoric states tend to take a while to give way to a harsh reality check. But it's fair to point out that there's a lot of exciting good sentiment going on in various markets. We see it in the extreme outperformance of momentum stocks, the frenzied supply of AI-related semiconductors along the entire food chain, and the frenzied scramble for AI-themed derivatives and derivatives. can do. (NVIDIA's superiority is clear for all to see, as it is currently valued at over $2 trillion in the market, with companies like Super Micro Computers, Dell Technologies, and ARM Holdings, just to name a few). (We're seeing a rush to gaming, non-entity companies.) Call option trading volume is surging again, and Bitcoin is soaring. The new all-time high woke up even the silly “meme coins,” and busted and heavily shorted consumer concept stocks (Beyond Meat, Sweetgreen) rose on whispers of improving fundamentals. . Still, there are arguments that this is all just a bull market behaving like a bull market. There's always a “hey, you never know” energy that starts to inject into parts of the tape after the rally has been going on for a while. Although speculative fever has returned, it still lags behind the careless go-go risk bidding that prevailed in late 2020 and early 2021. And while it's true that three more brokerage strategists last week scrambled to lift the S&P at the end of the year, Wall Street The new median target is just 5,100, nearly 1% below Friday's closing price. Wall Street's View Bank of America has long tracked the consensus recommendation of stock allocations among strategists. It hit 55% last week, slightly above the 15-year average, but nowhere near the highs of late 2021, not to mention the stratospheric levels seen around the turn of the millennium. Similarly, BofA's wealth management client has restored his equity exposure to over 61%, above the 20-year average, but near his 4800, the S&P 500's previous peak in early 2022. It's well short of the highest value ever recorded. Money traders are once again eyeing call options and flimsy “story stocks,” but overall flows into equity funds are still modest. Still, depending on how you look at it, stock valuation is one of the better psychological indicators, and by that standard, the investment community is pretty passionate. The S&P 500 currently trades at 20.6 times his 12-month forward earnings forecast. This is also a high indicator compared to history, but it has not yet reached its peak in 2022, let alone the height of skyscrapers during the more than 20-year tech bubble. Before. The Street is not ignoring the obviously difficult valuation backdrop, but many of the market's handicappers have been busy in recent weeks explaining why there's no need to fear it. BofA's Quantitative Equity Research Group begins with the view that “the S&P 500 index is unusually expensive relative to its history,” at the 95th percentile since 1900 on a P/E basis, suggesting lower returns over the next 10 years. are doing. But BofA's Savita Subramanian went on to say that “emotion and surprise are more important. In a three- to 12-month period,” “the validity of comparing the index to when you were younger is questionable.” Stated. She argues that the much higher quality composition of today's S&P 500 (with a less leveraged balance sheet and much less volatility in earnings) supports its higher valuation. Citi's Scott Kronert said the market is currently sniffing out future earnings upside for this typical stock, and given the heavy weighting of overvalued mega-growth companies, valuations are lower than the overall index. is one of those who argue that the P/E ratio is not as extreme as it might suggest. To expand the strength of the stock market. Barclays' Venu Krishna said in raising his S&P 500 target from 4,800 to 5,300 that he believes “Big Tech's earnings exceptionalism justifies the group's premium multiple, while We believe that the stock is trading in line with fair value.” Inflation headwinds are easing and the reset to economic growth is becoming shallower. ” said Lori Carbasina of RBC Capital. “Our S&P 500 valuation model continues to show that if inflation moderates, the 10-year Treasury yield will rise slightly, the economy will recover later this year, and the Fed will cut rates.”In the second half of the year, the S&P 500's P/E ratio could end the year above 23. More simply, the S&P 500's P/E ratios continue to rise across the board, but not alarmingly, while the median P/E ratio remains near historical peaks among the index's top 10 names. . ” All these are certainly plausible. Valuations have never been a good timing tool, but they have been rising over the long term for decades, with higher highs and higher lows throughout the cycle. And when earnings expand, bond yields stabilize, and the Fed's next rate cut is likely, markets can typically avoid severe valuation compression. Are blind spots developing? Still, the commonplace rationalization of optimism built into stock valuations can reasonably be viewed as a potential blind spot, even if it is just another element in the belief phase of a bull market. They tend not to appear just before large peaks. . With the S&P 500 beating his 200-day moving average by more than 13%, it's up quite a bit and hasn't fallen more than 3% since October. It can be difficult to continue giving the market questionable profits when bullish views are becoming the consensus. I have been countering two main complaints leveled at the market for several months. The idea is that the market is dangerously concentrated in a half-dozen giant stocks, and that stock price gains depend heavily on early and deep rate cuts from the Fed. The market says otherwise. Currently, three of the so-called “Magnificent Seven” stocks are significantly underperforming, and the slack has been taken up. The “proper” cyclical sectors (tech plus industrial goods and consumer spending) are leading the way, and the weighted S&P 500 index is surging toward record highs. And when it comes to the Fed, the market has been pricing in about six rate cuts this year since March, and it's more likely that there will be about three cuts since May, but the tape is not scratched at all. -Expected growth and reassurance that the Fed has plenty of room to cut at will at any time. The test passed, even though there is no guarantee that it will pass on the next test. It doesn't hurt to expect air pockets to appear in the near future. Because even though semiconductor stocks trade like rare rights to a wonderful future world, there will eventually be an air pocket. Bottom line: We're in a bull market right now, which means we're going to see upside overshoots, and displays of tenacious strength like we've seen in the past four months, especially at the beginning of the year, are usually That means further upside in the coming months. Stocks aligned to “mid-cycle” conditions have far outperformed groups associated with late- or late-cycle conditions, which is reassuring so far. The S&P is up 25% in four months, which feels like a lot of progress in a hurry, but it's only up 7% compared to 26 months ago. So while it's okay to believe, it helps to be careful when signs come in that such faith is misplaced.
