Even though it's uncertain if stocks are in a bubble or a strong bull run, some market participants think the relentless U.S. stock gain is about to pause.
S&P 500 (.SPX), opens new tab index is up 25% in the last five months, a phenomena BofA Global Research has only seen 10 times since the 1930s. CFRA Research data showed that the S&P has reached 16 record highs this year, the most in any first quarter since 1945, headed by Nvidia (NVDA.O).
Bullish investors say that gains are due to good fundamentals, not bubble-era fantasy. A healthy U.S. economy, predictions the Federal Reserve would drop interest rates this year, and excitement over AI's business potential are common factors.
However, some investors think the market's near-constant rise signals a downturn. The S&P 500 last fell more than 5% in October, although BofA research shows such sell-offs occur three times a year on average. The index rose 8.5% this year.
"A lot of good news is priced into the market," said State Street Global Advisors chief investment strategist Michael Arone. "From my perspective that just suggests that the risks are skewed to the downside." It is unclear what could prompt a market sell-off. While stronger-than-expected inflation has lowered predictions for how deeply the Fed would drop rates this year, many still expect lower borrowing costs. Consumer pricing increases also indicate economic strength.
Investors have mostly ignored other concerns, such as U.S. regional bank instability and China's weak economy. However, several indicators flash warnings. Miller Tabak data showed that the S&P 500's weekly relative strength index (RSI), which measures stock overbought or oversold, has risen to little over 76, a level it has rarely reached since 2000.
In January 2018, the S&P 500 fell 10%, while in January 2020, COVID-19 caused a 30% drop. Increased investor optimism raises concerns. The latest weekly survey from the American Association of Individual Investors found 51.7% of investors enthusiastic on equities' six-month outlook, the fourth time in nearly three years.
Because optimism raises the bar for positive surprises, it is generally considered a contrarian sign. "The sentiment backdrop right now... makes the market vulnerable to a turn lower," said Charles Schwab senior investment analyst Kevin Gordon.
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