Stocks have soared to record highs this year on the back of an unexpectedly resilient US economy and a euphoric AI boom. Defying Wall Street’s already buoyant — and still bullish — forecasts, the S&P 500 is up more than 15% year-to-date, while the tech-powered Nasdaq is up roughly 20% as big tech continues grow.
Analysts are scrambling to keep up with the market, with a bullish gold even turning higher. But while that epic first-half market rally and ever-higher valuations have some fearing a correction may be on the way, Bank of America still doesn’t see enough of the 10 classic signs of a bullish peak. the market.
“We’ve seen an uptick in demand in recent weeks for bull market charts, the triggers that typically precede a peak in the S&P 500…The good news? Today 40% have been triggered versus an average of 70% before previous bull market peaks,” Savita Subramanian, Bank of America’s head of US equities and quantitative strategy, wrote in a note on Friday.
It noted that its 10 indicators – which include measures of consumer confidence, credit stress, earnings growth and more – are not the “holy grail” for predicting stock market tops. But when a large number of them are triggered, it signals a growing risk for investors.
For now, however, with only four out of 10 charts flashing warning signs, Subramanian recommended investors avoid panic selling. She also noted that many of the classic bull market peak indicators that other strategists use “sound worrisome but have little information content.”
The veteran strategist went on to warn that trying to time market entries and exits to avoid short-term losses is usually a fool’s errand. “Staying invested is generally superior to emotional selling,” she said. “For the S&P 500, time is literally on your side: the probability of a loss in the index over a 1-day period is roughly equivalent to a currency flip, but declines rapidly as the time horizon expands.”
With these words of caution in mind, it can still be useful to track Subramanian’s 10 Bull Market Peaks, especially for more active investors. Here’s what the strategy guru monitors when she’s looking for signs of a market correction.
10 Signs of a Bull Market Peak
1. Consumer confidence (induced)
Consumer sentiment tends to improve before stock market peaks. The Conference Board’s Consumer Confidence Survey typically hits 110 or more within six months of a market peak before falling alongside stock prices, according to Bank of America. This indicator was activated in January, when it reached 111.
2. Consumers turn bullish on stocks (Induced)
Despite the impressive track record of US stock gains, consumer expectations for stock market returns are typically quite low. When this changes, it can signal a market top. Historically, when the Conference Board survey shows that the net percentage of consumer bullies in stocks reaches 20%, a market peak occurs within six months. This indicator was activated in the spring; A net 23% of consumers are now bullish.
3. For sale–On the side of The narrator
Paradoxically, when Wall Street analysts are overwhelmingly bullish, that can be bad news for stocks. In half of the last six bull markets, BofA’s Sell-Side Indicator — which tracks the average analyst-recommended portfolio allocation to stocks — has flashed a “sell” signal within six months of the market’s peak. The indicator is currently in “neutral” territory.
4. Long-term growth expectations
When analysts’ long-term growth views for the S&P 500 are more than one standard deviation above their five-year average, it can signal that a market top is on the way. “When expectations are high, stocks are more likely to disappoint,” Subramanian noted.
5. Increased activity of mergers and acquisitions
When M&A rises one standard deviation above the 10-year average, it can signal confidence and a late-cycle stretch for growth opportunities, Subramanian explained. M&A activity rose before the dot-com bubble of the 1990s, the Global Financial Crisis and even the bear market of 2022. It is picking up again today, but still well below the threshold that would trigger the Subramanian indicator.
6. evaluations plus inflation
A high price-to-earnings (PE) ratio—a common metric used to value stocks—coupled with high inflation is a bad sign for markets. When the sum of the trailing S&P 500 PE ratio and the annual rate of consumer inflation reaches one standard deviation above its 10-year mean, it has signaled a market top 66% of the time since 1990. It is currently 0.9 standard deviations above average.
7. Performance of ‘expensive’ vs. ‘cheap’ stocks
Stocks with low PE ratios (cheap) tend to outperform those with higher PE ratios, but that change before the peak of the stock market. Low PE stocks have underperformed high PE stocks by at least 2.5 percentage points in the six months leading up to five of the last seven market tops. Although value stocks have underperformed growth stocks this year, however, this indicator has not been boosted.
8. Yield curve (Caused)
When long-term US Treasury yields fall below short-term US Treasury yields, it can signal weakening economic growth expectations and even a market top. This dynamic, called an inverted return curve, has occurred before five of the last eight bear markets. The yield curve has been inverted since July 2022 in the longest inversion in history.
9. Credit stress indicator
Bank of America’s credit stress indicator measures credit access, leverage, bad loans and more to determine consumer health and predict stock market tops. It has fallen below 0.25 within six months of three of the last five bull market tops, but currently stands at 0.39.
10. Loan Terms: Senior Loan Officer Opinion Survey (prompted)
Banks tend to make it harder to get loans before the stock market peaks; this is known as a tightening of credit conditions. Bank of America looks to the Senior Loan Officers Opinion Survey to measure credit conditions, and with a net 16% of banks tightening commercial and industrial loans to large companies, the indicator is flashing a warning sign.
#Raging #bull #market #hasnt #peaked #BofA
Image Source : fortune.com