Are US stocks a bubble? Forecasts

Analysts are wondering about the near future of US stocks: is the relentless rally ready for a break? The dilemma for investors is to understand whether, having reached this point, the extraordinary gains on Wall Street are really the result of a stock run or rather increasingly take on the appearance of a bubble ready to explode.
Bullish investors argue that these gains stem from solid fundamentals, rather than the kind of rampant speculation that has accompanied past bubbles.
Often-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.
However, others believe the market's near-uninterrupted rise means a retreat from these lofty heights is coming.
An expert analysis appearing on Reuters seeks to provide answers.
Is the US rally here to stay? The benchmark S&P 500 has risen more than 25% over the past five months, a phenomenon that has occurred only 10 times since the 1930s, according to BofA Global Research.
In an advance driven by stunning gains from chipmaker Nvidia, the S&P has already hit 16 record highs this year, the most in any first quarter since 1945, data from CFRA Research showed.
“A lot of good news is already priced into the market,” said Michael Arone, chief investment strategist at State Street Global Advisors.
“From my perspective this simply suggests that the risks are tilted to the downside.” It's not immediately clear what might cause a market sell-off.
While stronger-than-expected inflation has dented expectations about the depth of the Fed's rate cuts this year, many believe borrowing costs are still falling.
High consumer prices were also seen as a test of economic strength.
Investors have largely ignored other concerns, from potential instabilities at U.S.
regional banks to China's lackluster economy.
However, some indicators flash as a warning.
The S&P 500's weekly relative strength index (RSI) — which measures whether stocks are overbought or oversold — rose to just above 76, a level it has rarely surpassed since 2000, data from Miller Tabak showed.
The last two times the index topped those levels saw significant selling: a 10% drop in the S&P 500 in January 2018 and a 30% plunge with the pandemic after the index topped that level in January 2020.
read also What happens if Biden wins the 2024 US elections? Market Outlook Furthermore, the percentage of investors expressing a bullish view on the six-month outlook for stocks rose to 51.7% in the latest weekly survey from the American Association of Individual Investors.
High optimism is often seen as a contrarian indicator because it means that the level of positive surprises is high and markets may be vulnerable to negative moves.
Are US stocks really a bubble? For some, the market's optimism — coupled with parabolic moves in the shares of Nvidia and other AI-focused companies — has evoked comparisons to past periods in which asset prices rose to unsustainable levels and then collapsed, like the meme stock rallies of 2021 and the dot-com surge of 1999.
Nvidia shares are up more than 80% this year after tripling in 2023, making it the third most valuable U.S.
company.
Other AI-related stocks have posted huge year-to-date gains, including Super Micro Computer which is up 300% and is poised to join the S&P 500 Index.
Nvidia has shown a strong relationship with the performance of the S&P 500, JPMorgan strategists wrote.
“We warn investors that this relationship will likely work in reverse when the AI euphoria peaks,” the strategists said.
Keith Lerner, co-chief investment officer at Truist, is more cautious on the bubble, pointing out that the S&P 500's tech sector's three-year outperformance versus the broader S&P 500 is about 30%.
This is more or less in line with the 30-year average and far from the peak of just over 250% in March 2000.
read also If Trump wins the 2024 US election, what happens to the stock market? “Sentiment in stocks has warmed since mid-2023… but is nowhere near the bullish levels of previous market peaks,” wrote Savita Subramanian, equity and quantitative strategist at BofA Global Research.
According to him, the rally has strong legs to stand on.
It is therefore unclear whether the US stock bubble is inflating or not.