The American stock market appears to have exhausted its growth potential. Key metrics—from corporate earnings to valuations and investor sentiment—are at historic highs, indicating extreme overheating. My analysis confirms: there is virtually no room left for further upward movement.
A market veteran who long headed investment strategy at Leuthold Group conducted an in-depth study of the current situation. The results are striking: the S&P 500 index is trading roughly 60% above its long-term trend line, which has been forming since the end of World War II. Such a deviation has been recorded only once before—at the peak of the dot-com bubble in the early 2000s.
Record figures across the board
Corporate earnings over the last 12 months also came in 60% above the trend line. This gap has already been called a record in the entire history of observations, even surpassing the dot-com era figures. Moreover, profit margins and business investment outside the financial sector relative to GDP have updated their historic highs.
Forecasts of future returns look unusually elevated and are holding near their highest levels since 1990. The share of stocks in household assets has also reached a record level, while the amount of cash relative to market capitalization, conversely, has approached a historic low. This is a classic sign of extreme investor overconfidence, accustomed to buying on every dip.
"Nobody cares about a recession anymore because there hasn't been one in 16 years," the strategist noted. The market has conditioned participants to believe that any drawdowns should be bought, creating an extremely vulnerable structure.
Economic slowdown—the main risk
However, the macroeconomic backdrop is beginning to send alarming signals. The latest ADP employment data, slowing retail sales, and declining housing market activity point to cooling. The Citigroup Economic Surprise Index has collapsed from 60 to 25 points over recent weeks, showing that actual data is increasingly diverging from optimistic forecasts.
The key risk I see is a scenario of Federal Reserve rate cuts. If the regulator moves to ease not because of slowing inflation but because of economic weakness, it could trigger not growth but a sharp market decline. Investors pricing in imminent rate cuts as a growth stimulus could be badly mistaken.
Additional pressure comes from oil prices, which are eating into corporate profits and household purchasing power. Concerns around the U.S. Treasury's bond buyback program, in my view, are exaggerated—the recent yield fluctuations are more noise than a sign of real change.
Whether this slowdown will turn into a full-blown recession remains unclear. Much will depend on how quickly macroeconomic data deteriorates in the coming weeks. But at current extreme valuations, the market is highly vulnerable to any negative surprise.
My expert opinion: investors, especially holders of risky assets, should seriously reconsider their risk tolerance. Historical precedents show that after such deviations from the trend, a correction is only a matter of time, not a hypothetical possibility.