The "surge" of US stocks has led many investors to put forward the "foam theory". But according to the strategist of Societe Generale SA, even if the U.S. stock market is forming a foam, it still has a lot of room for expansion before the foam bursts.
The bank's strategist team led by Manish Kabra said that the S&P 500 index may need to climb to 6250 points, which is about 20% higher than the current level, before reaching the multiple of the peak of the Internet foam in 2000. This indicates that although people are concerned that the stock market has risen too high, in reality it is still possible for it to continue to rise significantly.
"We believe that the current rebound is more driven by rational optimism than irrational prosperity," they wrote in their latest report.
The strategists of the bank mentioned "better than expected" profits, new profit cycle highs, and an improvement in global economic indicators. The report states, "We expect these driving factors to continue to persist."
In the past 19 weeks, the S&P 500 index has risen for 16 weeks and set a series of historical highs, due to enthusiastic expectations of artificial intelligence (AI), sustained economic strength, and the Federal Reserve's start to relax policies. Such an American stock market looks like a huge foam, which has triggered a heated debate on Wall Street.
Wall Street big banks, including Morgan Stanley and Deutsche Bank, have been constantly warning about the potential foam in the market recently. Marko Kolanovic, chief market strategist of JPMorgan Chase, believes that the sharp rebound of the U.S. stock market and the rapid breakthrough of Bitcoin over the $60000 mark are both signs that the foam is gradually blowing up.
He believes that these developments indicate that foam are accumulating in the market - foam usually occur when asset prices rise at an unsustainable rate.
Deutsche Bank pointed out that since World War II, the US stock market has only risen at such a rapid pace twice in a four month period. The bank explained that, in addition to the "post recession recovery", it was only in the Internet foam period in the late 1990s, when the US stock market soared, but the fact proved that this rise was unsustainable.
On the other hand, major banks such as Bank of America and Goldman Sachs insist that the current upward trend is reasonable. Goldman Sachs Chief US Equity Strategist Kostin believes that it is reasonable for the market to experience a risk taking sentiment. Although large technology companies have high valuations, this high valuation is supported by fundamentals.
A strategist at Bank of America, led by Savita Subramanian, pointed out that although the rise in the US stock market since last year has been strong, it has not reflected the situation that occurred in previous boom and bust cycles, such as the huge gap between stock prices and their values, or the extensive use of leverage.
"The inflection point signal indicates that the US stock market is still in a bull market and can continue to rise. The S&P 500 index has significant room for overshoot as its new high aligns with the new high of the profit cycle," wrote Kabra, a strategist at Faxing in a report
Finally, he also suggested that clients continue to be bullish on US technology stocks, as it is expected that profits will further accelerate in the first half of this year. At the same time, due to the return and redistribution of global supply chains, industrial stocks should continue to be bullish.