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Is the Stock Market Rally Sustainable amidst Tech Optimism?

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2024-02-28

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Amidst a significant uptrend in U.S. stock markets, some investors may question whether it's becoming too much of a good thing.

The S&P 500 has witnessed an extraordinary surge over the past few months, marking a more than 25% increase from its October lows. According to Deutsche Bank Macro Strategist Henry Allen, "The current rally is almost unprecedented."

The index has experienced gains in 15 out of the past 17 weeks, a feat only matched once before in the past fifty years, in 1989. If it manages yet another gain this week, making it 16 out of 18, it would be the first occurrence since 1971.

Optimism has surged for understandable reasons. Inflation has continued to ease while economic indicators remain positive, leading to speculation of impending interest rate cuts by the Federal Reserve. Consequently, Treasury yields, which previously weighed on equities, have declined.

However, the question arises whether these factors alone justify the surge in stocks.

Tom Essaye, Founder and President of Sevens Report, expresses concerns that the relentless rally may have outpaced actual improvements in fundamentals and reasonable expectations for further improvement.

Despite market expectations for interest rate cuts in 2024 decreasing from seven to four, none have occurred amidst the S&P 500's rapid ascent. Moreover, inflation remains below the Fed's target.

The massive rally, primarily fueled by enthusiasm for artificial intelligence and select tech stocks, has raised fears of a tech stock bubble reminiscent of the dot-com bubble.

Conversely, Nvidia's robust revenue and profit growth highlight the tangible benefits of AI. Dave Rosenberg, President of Rosenberg Research, notes Nvidia's transformative impact, though cautioning that its near-monopoly position may not last indefinitely.

Deutsche's Allen also flags the rally's narrow breadth as a potential vulnerability, indicating that the S&P 500's weighted performance significantly outpaced its equal-weighted counterpart in 2023.

While Nvidia's valuation appears reasonable, the broader S&P 500 index appears pricey, trading at nearly 22 times forward earnings. Concerns also loom regarding potential backlash against AI, with calls for increased regulation.

Though skeptics have yet to be proven right, uncertainties persist. Analysts project further upside for the S&P 500, but the possibility of a near-term pullback remains. While it's unclear if the AI boom is approaching its peak, it's essential to acknowledge that definitive answers may elude us for now.

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