A robust bull market has emerged in the stock sector, with the S&P 500 index achieving a staggering 42 record closing highs this year and experiencing a remarkable surge of over 20%.
Several analysts believe that this upward momentum will continue, pointing to strong earnings as a key factor driving the trend. According to FactSet, S&P 500 earnings rose by 11.3% in the second quarter compared to the same period last year. Although forecasts indicate a slowdown to a growth rate of 4.6% for the third quarter, this figure still reflects a healthy economic environment.
Additionally, proponents of the bull market argue that recent interest rate cuts by the Federal Reserve will further support stock performance by fostering economic growth and, in turn, encouraging earnings increases. On September 18, the Fed reduced rates by 50 basis points, and analysts anticipate another cut of 25 to 50 basis points during the upcoming meeting scheduled for November 6-7.
Historical data from a Schwab report shows that, in 12 out of the 14 instances where the Fed has initiated rate cuts since 1929, the S&P 500 experienced positive returns within a year following those cuts.
Conversely, skeptics highlight that the S&P 500 has not seen a 10% correction in 288 days, exceeding the historical average of 172 days between such downturns, as noted by PNC Financial Services.
Valuation metrics also suggest the possibility of a market correction. As of September 20, the S&P 500 was trading at 21.4 times analysts’ projected earnings for the next year, notably higher than both the five-year average of 19.5 and the ten-year average of 18.0.
In addition to these traditional concerns, Doug Kass, a columnist for TheStreet Pro and seasoned hedge fund manager, has highlighted a less frequently discussed risk: the structure of the market itself. Kass, who has worked in the investment industry since the 1970s and served as the director of research for renowned investor Leon Cooperman’s Omega Advisors, warns of increasing disconnection within market dynamics.
“Markets have increasingly become unhinged, both on the down and up sides,” Kass remarked in a recent article. He expressed concern over the exaggerated price movements and the presence of unusual stock outliers, citing examples like GameStop, AMC Entertainment, and many components of Cathie Wood’s Ark Innovation ETF, which have experienced significant volatility in recent years.
Kass concluded by stating that the current market structure fosters inefficiencies and extreme price fluctuations, which can lead to significant financial risk for investors on both sides of the equation.
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