The American stock market appears to have come very close to its limit. My analysis shows that the S&P 500 index, which has gained nearly 12% since the start of the year, has very little room left for further upward movement. The fact is that current quotes are more than 60% above the long-term trend line formed after World War II. Such a significant gap has been observed only once — at the peak of the dot-com bubble in the early 2000s.
Fundamental indicators at extremes
The situation is aggravated by the fact that corporate profits over the last 12 months have also turned out to be 60% above their trend. This is a record figure in the entire history of observations, surpassing even the peak values of the dot-com era. Corporate profit margins and the volume of business investment (outside the residential sector) relative to GDP have also updated historical highs.
Forecasts for future returns look anomalously optimistic and remain at the highest levels since 1990. At the same time, the share of stocks in household assets has reached a record level, and the volume of cash relative to the market value is near a historical low. Investors, accustomed to buying on every dip over the past 16 years (a period without recessions), have become too overconfident.
Macroeconomic risks and the rate cut scenario
It is worth paying attention to a number of weakening indicators. The Citigroup Economic Surprise Index has collapsed from 60 to 25 points over the past few weeks, indicating a significant divergence between actual data and forecasts. Slowing hiring according to ADP data, weakness in retail sales, and a decline in housing market activity — all these are alarming signals.
The key risk for the market is a scenario in which the Federal Reserve begins cutting rates not because of slowing inflation, but because of economic weakness. In that case, rate cuts could trigger not growth, but a sharp market decline. Additional pressure is also created by oil prices, which cut into corporate profits and household purchasing power.
It is not yet clear whether this slowdown will turn into a full-scale recession, but the market's overvaluation combined with deteriorating macroeconomic data creates an explosive mixture. In my view, this is not a question of "if," but a question of "when" — and investors should prepare for increased volatility in the coming weeks.