Is the US Market Really Facing a Collapse Risk?
The US Stock Market: a Deep Dive into the Tech Phenomenon
Over the past two years, the US stock market has seen a strong recovery from the significant contraction experienced in 2022.
Despite the recent impressive performances of the S&P 500 and Nasdaq, which have been yielding substantial profits to investors, concerns are rising about a potential collapse due to the current technical overextension.
Various technical and fundamental indicators are suggesting an imminent correction.
So, what indicators should we follow to interpret the US stock market trends accurately?
US Growth Driven by Technology
The Nasdaq has exhibited remarkable growth in recent years, primarily led by the stock prices of tech giants such as Apple, Microsoft, Amazon, and Google, not to mention the incredible surge in NVIDIA’s share price.
A concentration of market capitalization on a few stocks is evident, encouraged by the inflow of capital into ETFs, passive investment tools that often track market-weighted indices, thus amplifying this trend.
The surge in the tech sector can, to some extent, be justified by the increased profit margins of AI companies.
Technology companies continue to demonstrate their strength, with NVIDIA exceeding profit expectations as demand for its products remains robust.
The Market Shift with the Dominance of Tech Stocks
Although the gap between the S&P 500 and the S&P 500 Equal Weight is narrowing from its peaks, the market is still in an abnormal situation.
Market capitalization remains concentrated on a limited number of tech stocks, signaling an excessive dependency that could heighten fluctuations during a correction.
Additionally, the ratio between value and growth stocks is hitting concerning lows, with a significant portion of this difference attributed to the push from tech stocks.
This disparity underscores an overconcentration of investments in growth stocks, leaving value stocks undervalued and increasing the risk of a correction if confidence in tech stocks falters.
Nasdaq: Technical Concerns
From a technical perspective, the 14-day Relative Strength Index (RSI) of the Nasdaq 100 has surged to 77 points, well above the overbought threshold.
This notably high RSI, especially on a weekly timeframe, has historically foreshadowed market corrections.
Another worrying sign is the deviation of S&P 500 stock prices from their 200 and 50-day moving averages, nearing historic highs.
This pattern typically emerges at the end of a market cycle, hinting at a potential correction.
Despite the market hitting new highs daily, the Fear & Greed Index indicates fear, showcasing how the market’s stellar performance is increasingly concentrated on a few stocks driven by the AI trend, regardless of negative investor sentiment.
Lastly, the VIX volatility index remains neutral, masking underlying risks that could unexpectedly surface in case of unforeseen events or economic changes.
The lack of demand in the High Yield bond market, historically tied to S&P 500 stock prices, further underlines the market’s selective positivity amidst overarching skepticism.
Ignoring Geopolitical Risks
Current geopolitical tensions pose a significant risk to the market, with conflicts in Ukraine, complexities in Israel, and trade issues with China all highlighting sources of uncertainty that could negatively impact financial markets.
Despite these risks, investors seem to overlook or underestimate them, maintaining an optimistic stance.
Moreover, the upcoming US elections could influence the Federal Reserve’s monetary policy.
The recent postponement of interest rate cuts by Jerome Powell until 2024 might be a strategic move to keep markets on edge with promises of future reductions.
However, the current economic conditions and inflation do not justify rate cuts, raising doubts about the sustainability of this policy amid looming uncertainties.
