Several institutions have recently raised their target prices against the S&P 500 index, demonstrating confidence in the development of artificial intelligence and economic prospects. However, behind the rise of US stocks, the main contributors to the index are still concentrated in a few large cap technology stocks, which reminds many people of the Internet foam period at the beginning of this century.
With the recent high volatility of several stocks, including Nvidia, the risk of technical indicators and emotional changes has become a reason for some market participants to worry about stock index adjustments.
Is the crowding a foam
Goldman Sachs statistics have found that the top ten companies in the S&P 500 index account for nearly 30% of the total market value, approaching historical highs. In the past century, there have been seven similar extreme market periods, with the index falling 23% and 18% respectively in the 12 months after the market width bottomed out in 1973 and 2000. In 1932, 1939, 1964, 2009, and 2020, the average 12-month return rate was 23%.
Goldman Sachs senior strategist Ben Snider wrote that the frequency of index gains is higher than that of pullbacks, and there is reason to remain optimistic. According to his calculation, the P/E ratio of the top ten companies is far lower than the comparable median during the Internet foam, and the median profit is almost three times that of 2000 or 1973.
Recently, several institutions, including Goldman Sachs, UBS, Barclays, and Bank of America, have raised their expectations for this year's S&P 500 index target, reaching a maximum of 5400 points, with nearly 6% upward potential compared to the current level. The strong US economy, expectations of interest rate cuts from the Federal Reserve, and optimism about the commercial potential of artificial intelligence have become reasons to continue to be bullish.
Jamie Dimon, CEO of JPMorgan Chase, recently expressed his views on artificial intelligence and its profound transformative prospects. He believes that compared with the Internet foam at the end of the 1990s, AI has a broader prospect. This is not hype. It is a real force of change.
Last week, Bank of America Global raised its profit forecast for the S&P 500 index, predicting a 12% increase in profits for benchmark index components this year. The report states that 2023 is a transitional year for American companies, which have now adapted to new higher interest rates and a lukewarm demand environment. Technology giants such as Microsoft, Amazon, Google's parent company Alphabet, and Meta are expected to spend $180 billion on capital expenditures this year, possibly benefiting from the "virtuous cycle" brought about by artificial intelligence investments.
Along with the rapid development of the semiconductor and technology industries, the increase in electricity usage and the physical construction of data centers will drive more demand for electrification, utilities, commodities, and more. Bank of America predicts that as large technology companies enter the investment cycle, demand recovery will be a key driving force for profitability and further expansion by 2025.
When will adjustments occur
Driven by technology stocks, the US stock market is in one of the strongest upward cycles since the 1970s. The S&P 500 index has risen for 16 out of the last 19 weeks, with a rise of nearly 25% during that period.
Deutsche Bank pointed out that since World War II, the S&P 500 index has continued to rise by more than 20% in four months, with a total of five occurrences. Four of them were when the economy came out of recession, and one was during the Internet foam. "So, if you think that technology is in the midst of a foam, or that the recession has just been postponed, you may need to worry. Of course, the rise itself is not enough to justify a sharp correction." wrote Jim Reid, the bank's chief strategist.
Boris Schlossberg, macro strategist at BKasset management, stated in an interview with First Financial that in the medium to long term, the stock market is mainly influenced by economic and monetary policies, which determine market pricing and corporate profitability. He believes that the market trend that began at the end of October last year first originated from the expectation of the Federal Reserve's policy peaking and turning, followed by an optimistic outlook for the rapid development of artificial intelligence technology and performance realization.
Schr ö sberg believes that recent data shows that consumer spending and the labor market continue to provide support for the US economy, and the hope of a soft landing looks very high. The outlook for monetary policy is slightly uncertain, although inflation is moving towards the target set by the Federal Reserve, it is not yet time to announce victory. However, based on the statements of Federal Reserve officials, the direction of interest rate cuts this year is basically confirmed, so there are currently no significant risks to the economy or monetary policy.
With the US stock market at historic highs, the panic index VIX, which measures market volatility, has recently fallen to a recent low. However, the volatility pattern of the market itself is still worth paying attention to. Bank of America statistics have found that on average, there are more than three 5% sell-offs in the US stock market each year, with the last one occurring in October last year.
Schlossberg told First Financial that it is difficult to predict the reasons that will ultimately lead to market adjustments. It could be a demand for profit taking, or it could be a cooling of aggressive market sentiment. He reminded us not to overlook the impact of the derivatives market, especially in the trading of ultra short term options.
Since last week, several star stocks, including Nvidia, have experienced significant fluctuations, which may be one of the signs of short-term market volatility. Miller Tabak's data shows that the relative strength index (RSI) of the S&P 500 index has climbed to over 76. After exceeding this level twice in the past, there has been a significant sell-off: in January 2018, the S&P 500 index fell by 10%, and in January 2020, due to the panic caused by the pandemic, the S&P 500 index plummeted by 30%. "All of this does not mean we are looking for an important long-term high point. But it does tell me that the time is ripe for a substantial pullback," said Matt Maley, chief market strategist at the institution
The growing optimism of investors also needs to be cautious. In a survey by the American Association of Individual Investors (AAII), the proportion of investors who are optimistic about the outlook for the next six months has risen to 51.7%, the fourth time in nearly three years that it has exceeded 50%. Highly optimistic is often seen as a reverse indicator, as it means that the threshold for unexpected surprises has been raised.