The U.S. stock market has reached a critical juncture: growth momentum is fading, and stock valuations have hit historic highs. My analysis shows that the S&P 500 index is trading roughly 60% above its long-term trend line established after World War II. This is an extreme deviation, previously observed only once—at the peak of the dot-com bubble.
This is not just about the price chart. Corporate earnings over the past 12 months are also 60% above the trend line—a record gap in the entire history of observations, exceeding even the dot-com era figures. Corporate profit margins and the share of business investment in GDP have hit all-time highs. Future return forecasts look unusually inflated and are holding near their highest levels since 1990.
What is even more concerning—stock valuations remain historically high, even if not all securities are currently at absolute peaks. The share of stocks in household assets has reached a record, while the amount of cash relative to market value has approached a historic low. Investors have become overly confident: the market has trained them to buy on every dip and expect further growth. "Nobody cares about a recession anymore because there hasn't been one in 16 years"—this is a key phrase reflecting the current sentiment.
Economic slowdown could change the game
A number of macroeconomic indicators are already showing weakness: the latest ADP employment data, slowing retail sales, and declining housing market activity. The Citigroup Economic Surprise Index has sharply dropped from 60 to 25 points in recent weeks, showing how much actual data diverges from optimistic forecasts.
Special attention should be paid to the rate-cut scenario. If the Fed begins easing monetary policy not due to slowing inflation but due to economic weakness, the market may react not with growth but with a sharp decline. This risk is currently higher than many assume. Oil prices add additional pressure: they reduce corporate profits and erode household purchasing power.
I consider the concerns about the U.S. Treasury's bond buyback program, recently discussed, to be exaggerated. The latest yield fluctuations are more noise than a sign of real change. However, whether the current slowdown will turn into an outright downturn remains unclear. Much will depend on how quickly macroeconomic data deteriorates in the coming weeks.
My verdict: the market is in a high-risk zone. Extreme valuations and investor complacency create a fragile structure. A sensible strategy is to reduce the share of risky assets and increase cash to weather a potential correction.