The U.S. stock market continues its ascent, with the S&P 500 index flirting with the significant 5,000 milestone. However, some analysts, like Doug Ramsey of Leuthold Group, caution that persistently high valuations could make the market more susceptible to a downturn.
This bullish streak comes on the heels of a growing U.S. economy, signs of easing inflation, and an upswing in investor confidence surrounding innovations in artificial intelligence (AI). Yet, there’s a lingering sense that the market is ignoring underlying risks. The current bull run began in October 2022, and even then, valuations were considerably higher than historical averages.
Ramsey points out that even recent declines in the S&P 500 have not significantly corrected valuations. These include the pullbacks triggered by the COVID-19 pandemic. Today, the index’s forward-looking price-to-earnings ratio paints a picture of potentially overstretched market expectations.
Bob Doll, of Crossmark Global Investments, expresses concerns about investor optimism leading to unrealistic expectations. Many seem to be betting on both rapid earnings growth and a series of substantial interest rate cuts by the Federal Reserve. In Doll’s assessment, a significant slowdown in the economy may be necessary to prompt the Fed to make multiple rate cuts this year. A strong labor market with potential wage growth also risks keeping inflationary pressures higher than desired.
This brings into question the sustainability of the current rally. If economic conditions don’t unfold as favorably as many hope, could there be a market correction on the horizon? Ramsey contends that even without a formal recession, market risks are elevated due to persistent high valuations and the lagged consequences of previous Fed interest rate hikes.
The excitement surrounding AI and technology stocks has certainly been a contributor to the S&P 500’s impressive start to the year. Yet, Doll urges caution against excessive hype. Savvy investors might look to AI-adjacent companies while prioritizing more reasonable valuations as the market landscape develops. As Solita Marcelli from UBS Global Wealth Management notes, incumbent tech leaders may ultimately prove the most reliable beneficiaries of the AI revolution.
While the market optimism and technological advancements are exciting, caution seems warranted. Investors should avoid blindly chasing returns and carefully evaluate valuations with a critical eye before pouring money into hot sectors. Ultimately, the success of the stock market and broader economy in 2024 will hinge on whether inflation cools as hoped, if a “soft landing” is achievable, and how the potential future impact of AI-driven changes manifests in the real world.
