Column-The five charts flashing red for U.S. equity bulls: McGeever
2024.12.17 09:31
By Jamie McGeever
ORLANDO, Florida (Reuters) – As the classic market cliche goes, investors should worry most when the consensus is overwhelmingly optimistic and be bullish when it’s overwhelmingly bearish.
If investors apply this logic to the 2025 U.S. stock market outlook, they should be running for the hills.
By many measures – sentiment surveys, positioning, valuations – the helicopter view of Wall Street has rarely been rosier.
This wave of ‘U.S. exceptionalism’ won’t catch anyone unawares. It has been building to a crescendo all year as the AI and tech boom steered the U.S. economy away from any kind of landing – hard or soft – and fueled the stock market’s eye-popping outperformance.
But some of the numbers are flashing red and not just for the die-hard contrarians. In fact, the wave of optimism has been so powerful that it has swept away some of the Street’s most prominent bears.
Even ‘Dr Doom’ Nouriel Roubini and David Rosenberg of Rosenberg Research have recently appeared to embrace the ‘TINA’ (There Is No Alternative) view on U.S. stocks.
When the bears are capitulating, it’s definitely time to worry, right?
Probably, unless it really is different this time. And the last three years suggest this could be the case, as the post-Covid world has been unlike anything found in economic textbooks and market playbooks.
According to Dario Perkins at TS Lombard, U.S. market and macro bears have repeatedly misread the post-COVID “fake cycle”. They’ve been fooled by the inverted yield curve, put too much emphasis on (mis)leading indicators, and misinterpreted labor market normalization as weakness.
“As the economy returns to more regular drivers, this sort of error should stop,” Perkins says. Hopefully, the bears are just “embracing reality, having been excessively pessimistic” for three years.
That may turn out to be the case, but even so, it would hardly be a return to business as usual. Indeed, there’s a lot about the U.S. equity market right now that is highly unusual.
The fact that the and Nasdaq are at record highs is not one of them. Stocks go up over time as the economy grows and productivity, innovation and company profits rise. But there are grounds for caution.
The difference between U.S. and European equity valuations has never been wider; Wall Street’s share of the world equity market cap has never been bigger; and U.S. consumers’ stock market outlook for the coming 12 months has never been more optimistic.
Extreme valuations are no guarantee of an imminent crash or correction. But as AXA Investment Managers’ Chris Iggo rightly observes, they change the risk calculus.
Still, a correction needs a trigger. What could that be this time around?
Valuations may finally spook investors, and the unwind becomes an unraveling. Perhaps it’s U.S. President-elect Donald Trump’s policy agenda, the fragile political-economic axis in Europe, or China’s economic struggles. Or maybe some underlying risk that no one is paying attention to.
The S&P 500 has delivered total returns of around 35% since the Fed’s last rate hike in July 2023 and is set to record two consecutive years with 25%+ total returns.
As Iggo noted, “Given the backdrop, a third might be stretching it.”
(The opinions expressed here are those of the author, a columnist for Reuters.)
(By Jamie McGeever; Editing by Kirsten Donovan)
