The American stock market has approached a critical point: the S&P 500 index is trading 60% above its long-term trend line, which is an unprecedented deviation in all post-war history. In my assessment, this signals that the room for further growth is practically exhausted, and the risks of a correction have multiplied.
Analyzing the current situation, I see that key fundamental indicators—corporate earnings, multiples, and investor sentiment—are simultaneously at historical highs. This is an extremely rare combination, observed only once before, at the peak of the dot-com bubble in the early 2000s.
Corporate earnings over the last 12 months have also turned out to be 60% above the trend line, which is a record figure, surpassing even the dot-com peak. Profit margins and the share of business investment in GDP have updated their highs, and forecasts of future returns look unusually inflated, sitting at their highest levels since 1990.
Investor behavior is of particular concern. The market has trained them to buy on every dip, and now they have become overly confident. No one cares about a recession—after all, there hasn't been one in 16 years. This is a classic sign of the late stage of a bull cycle, when market participants ignore accumulating risks.
Macroeconomic signals are deteriorating
However, behind the facade of record valuations, alarming signals are hidden. Fresh ADP employment data, slowing retail sales, and a decline in housing market activity point to a cooling economy. The Citigroup Economic Surprise Index has collapsed from 60 to 25 points over recent weeks, indicating a significant divergence between actual data and consensus forecasts.
It is critically important to understand: if the Federal Reserve begins cutting rates due to economic weakness, rather than slowing inflation, this could trigger not growth, but a sharp market decline. Investors accustomed to policy easing always supporting quotes may face harsh reality.
Oil prices are also adding pressure, shrinking corporate profits and undermining household purchasing power. The dollar, adjusted for inflation, is within 8% of its historical high from 1970, adding additional stress for multinational corporations.
Concerns about the U.S. Treasury's bond buyback program, in my opinion, are exaggerated—this is more noise than a sign of real change. However, the overall picture remains troubling: the market is overheated, macroeconomic indicators are deteriorating, and investors are in a state of euphoria.
My verdict: the current market configuration resembles a powder keg. The combination of extreme valuations, weakening economic data, and investor complacency creates ideal conditions for a sharp correction. The question is not whether it will happen, but what will be the trigger. Prudent investors should consider hedging risks and reducing positions in overheated sectors.