Traders work on the floor of the New York Stock Exchange during early trading on March 6, 2024.
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While the U.S. market’s rebound has focused largely on expensive, artificial intelligence-focused technology stocks, analysts say Wall Street has not yet entered bubble territory.
this S&P 500 Index It has risen in 16 of the past 18 weeks and set a new all-time closing high on Friday, but the gains have been largely concentrated on the so-called “Magnificent 7” tech giants that led the surge Nvidia.
At the same time, the Federal Reserve is expected to Start cutting interest rates June could bring further bullishness to high-growth technology stocks.
The sheer size and narrow scope of the bull market has fueled fears of a market bubble, and UBS On Wednesday, strategists compared it to the late 1990s.
In January 1995, when the Federal Reserve completed a round of interest rate hikes, raising the federal funds rate to 6%, the S&P 500 Index began a bull market and achieved annual gains of more than 27% over the next five years. return rate.
Until the bubble burst in March 2000.
UBS chief strategist Bhanu Baweja and his team said: “The bull market of the 1990s was divided into two phases: a broad, steady climb from early 1995 to mid-1998, and then a narrow, more stable climb from late 1998 to early 2000. Explosive phase.” in research notes.
“Today’s industry structure, narrowness, and correlation are similar to the second stage of the market; valuations are not far different.”
However, despite superficial similarities, Baweja believes “the bubble hasn’t burst yet,” noting significant differences in earnings, realized margins, free cash flow, IPO and M&A activity, and options market signals.
While the enthusiasm for specific sectors is palpable today, UBS stresses that this enthusiasm is not based solely on hype, as was the case with much of the dot-com bubble, but on actual shareholder returns.
missing ingredient
TS Lombard highlighted in a research note on Monday that the top 10 companies in the S&P 500 account for approximately 34% of the index’s total market capitalization.
The research firm believes this concentration is necessary given the companies’ stellar earnings.
“However, it does mean that without the participation of the technology sector, it is difficult for the overall index to rise significantly, and it also means that the index is vulnerable to the risks unique to these companies,” said Skylar Montgomery Koning, senior global analyst. TS Lombard Macro Strategist.
However, the Fed’s dovish stance in recent months and strong economic growth have seen equity market breadth improve across industries and geography, with European and Japanese stock indexes hitting record highs in recent weeks.
More importantly, Montgomery Cornyn believes that the stock market rally so far is justified by fundamentals (namely policy and growth prospects, as well as a strong fourth-quarter earnings season).
she explain Every stock market bubble needs three ingredients to inflate: solid fundamentals, a compelling narrative of future growth, and liquidity, leverage, or both. Montgomery Cornyn said that while the AI-driven bull market meets the first two criteria, it appears to lack the third.
“Liquidity remains ample, but leverage has not yet reached worrisome levels. So far, QT has not caused a contraction in US liquidity because reverse repos (absorbing reserves) have declined faster than the balance sheet. In fact, Liquidity has been increasing since early last year and things are improving (a Fed rate cut in 2024 could exacerbate the bubble),” she said.
“But leverage doesn’t look worrisome; margin debt and options open interest suggest it’s not speculation driving the rally. Margin debt is up slightly, but nowhere near the 2020 highs.”
bad news?
UBS pointed out that the absence of bubbles does not necessarily mean the market will continue to rise, and Baweja pointed out that productivity growth is “completely different from the 1990s.”
“Of course, this could change, but current data on electronics and information technology orders, capex intentions and actual capex simply do not suggest that capital deepening is associated with productivity gains,” he said.
“Our globalization indicators show that globalization has stalled (indeed, weakened) compared with its fastest-growing period in the late 1990s. The economy is now late in the cycle.”
UBS believes that current economic conditions are closest to those seen at the end of the bull market in the 1990s and early 2000, with real disposable income growth “weak and likely to get weaker. These variables need to start to look more optimistic,” Baweja said. In order for the bull market to continue.
