The most recent rally on the US stock markets began three years ago, but the air is now getting thinner. While tech giants continue to shine, many stocks are showing signs of weakness.
• Despite initial signs of fatigue, the bull market continues
• Narrow market breadth and dependence on Big Tech is fueling increasing concerns
• Sentiment is changing: The Fear & Greed Index shows “extreme fear”
Three years of endurance running: When will the bull run out of steam?
When the S&P 500 bottomed in October 2022, a recovery seemed a long way off. Three years later, the leading index had one of the strongest three-year phases of the post-war period with an increase of 80 percent. Other indices such as the NASDAQ Composite or cryptocurrencies such as Bitcoin also grew at an incomparable speed.
From a historical perspective, this upswing has not yet come to an end. According to Reuters, bull markets since 1932 have lasted on average about five years and returned around 170 percent. “If a bull market isn’t ended by a recession, it can run for a very long time,” LPL Financial’s Jeffrey Buchbinder told Reuters. For many strategists, the current environment is therefore not a cause for concern.
Narrow playing field: Big Tech carries, the rest fights
But despite the impressive run, there are increasing voices expressing doubts about the breadth of the upswing: According to Bloomberg, the S&P 500 heavyweights of the so-called “Magnificent Seven” – i.e. Apple, Microsoft, NVIDIA, Tesla, Alphabet, Amazon and Meta – now hold around a third of the entire index. So while the giants continue to celebrate records, the equally weighted S&P 500 is clearly lagging behind. Fidelity strategist Jurrien Timmer speaks of an “unusually narrow market breadth” in this regard, which rarely occurs even in the early phase of a bull market.
Paul Ciana, Head of Technical Research at Bank of America Securities, warns about the dwindling breadth. “The market breadth looks terrible,” Ciana told CNBC. Upward movements are being driven by fewer and fewer stocks, while many stocks are trading below important support levels. Ciana believes a correction of 10 percent is likely in the coming months given the three-year exceptional performance.
The mood changes: fear instead of greed – but strategists remain calm
In keeping with this uncertainty, investor sentiment has also changed noticeably: CNN’s much-watched Fear & Greed Index currently stands at just 24 points and signals “extreme fear.” Just a month ago, according to CNN, “greed” reigned supreme. The nervousness stems primarily from the recent volatility: The VIX, the barometer for expected fluctuations, jumped by almost 30 percent at times.
Tom Lee, co-founder and head of research at Fundstrat, sees the recent market panic as a positive signal. “A spike like this in the VIX shows that investors are seeking protection – and that is often a sign of short-term capitulation,” Lee said in the CNBC interview. Lee sees the bull market intact despite setbacks, supported by structural drivers such as artificial intelligence, blockchain investments and the beginning of the Fed’s interest rate cutting phase.
Where is the bull market headed?
Although the current phase is controversial, the optimism on Wall Street remains noticeable. Bloomberg points out that the majority of bull markets continued into their fourth year and still saw significant gains on average. CFRA analyst Sam Stovall speaks of “sporty valuations” but sees no reason to call the end of the rally.
According to Marketwatch, there is already a rotation: small caps, utilities and healthcare stocks are catching up, while investors are shifting profits from tech stocks. The decisive factor will be whether the rally becomes broader. As long as the economy and the Fed remain stable, a bull market rarely ends in old age, but rather in panic. And despite all the nervousness, the US stock markets still seem to be a long way away from that.
Editorial team finanzen.net
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