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Ned Davis Research says investors should watch for signs of a potential top in the S&P 500.
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The secular bull market, which began in 2009, has matured, according to NTR’s Tim Hayes.
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“As the secular bull matures, we are looking for signs that it may be in danger,” he said.
with S&P 500 In the 15th year of a secular bull market that began in 2009, investors should heed the warning signs of a potential peak, according to Ned Davis Research.
In a note on Friday, Tim Hayes, NDR’s chief global investment strategist, said the secular bull rally is in its mature stages, so investors should watch for warning signs like emotional peaks.
“What’s warning that it’s ending? The answer comes down to sentiment — too much positive news for so long has become the new normal,” Hayes said.
He added: “The risk is that a lack of risk aversion will expose investors to a degree of prolonged macro deterioration.
Hayes isn’t calling for an immediate peak in the stock market, especially as falling interest rates act as a tailwind for stock prices, but he knows it could happen.
“The last two secular bulls lasted 24 years (1942 – 1966) and 18 years (1982 – 2000). But as the secular bull matures, we’re seeing signs that it may be in danger,” Hayes said.
Amid fundamental problems for the US stock market, the first warning sign of a near-term peak in the stock market is worsening.
In other words, if only a few companies drive up the stock market, it is a bad sign, Secularism peaked in 2000.
Investors needn’t worry about that signal flashing, the latest data is one Rise in market breadth.
According to Hayes, who added that higher valuations cost more in a perfect macro environment, extreme valuations are another warning sign to look out for, and if something goes wrong, those valuations can fall quickly.
“Expensive valuations may seem reasonable when earnings are growing, but when earnings are falling, the market will suffer,” Hayes said.
Long-term peaks in the stock market typically occur when earnings growth and economic growth hit extreme levels, as the flip side of that boom is usually a rapid decline in growth.
The secular stock market peaks of 1929, 1966 and 2000 all coincided with peaks in S&P 500 earnings growth, “and then prices fell as they realized the valuations weren’t justified,” Hayes said.
While valuations and earnings growth are currently at high levels, they have more room to grow, according to the note.
“The current level of earnings growth has not yet reached its peaks in 1929 and 2000, but has already closed in on 1966 levels,” Hayes said.
He added: “For a decline in income growth, we expect a decline in economic growth.”
Finally, Hayes said investors should keep an eye on bond yields and commodities as they reflect a possible rebound in inflation. And a rebound in inflation, rising interest rates, would be an unwelcome warning sign for the current bull rally in stocks.
“If that starts to turn into a severe cyclical bear, secular bear warnings will intensify, and we’ll see a reversal from the peak in valuations, earnings growth and economic performance,” Hayes concluded.
Read the original article Business Insider
2024-09-28 08:28:01