CFRA Research's chief investment strategist Stovall predicts that the US stock market will experience a pullback under the pressure of three major negative factors. Stovall also pointed out that the valuation of US large-cap technology stocks is too high. In the future, US tech stocks may soon show the "first crack in the ice".
Since the beginning of this year, the performance of US stocks has been unusually strong: the S&P 500 index has accumulated a 15% increase in 2024.
Recently, US stocks (especially technology stocks) have been on the rise: as of the closing of this Tuesday, the S&P 500 index rose 0.25%, to 5487.03 points, the 31st time to create a closing new high this year; the NASDAQ index, which is dominated by technology stocks, rose 0.03%, to 17862.23 points, creating a new closing high for the 7th consecutive trading day.
In this bull market, many institutional analysts on Wall Street have recently raised their target prices for US stocks and have crowded into the bull market camp. However, Sam Stovall, chief investment strategist at CFRA Research, recently issued a warning that US stocks will experience a pullback under three major unfavorable factors.
Will the three major factors suppress US stocks?
Stovall predicts that under the pressure of the three factors of the Fed interest rate, inflation, and stock valuation, the S&P 500 index will face adjustments and may fall by 5%.
Although the US inflation rate is declining, it is still higher than the Fed's target of 2%, causing Fed officials to repeatedly state that they expect only one interest rate cut by the end of this year.
However, the high interest rates of the past two years have caused the 2-year and 10-year Treasury bond yields to have the longest inversion in history, which is an important recession warning indicator in the US bond market.
Whenever the yield of U.S. 2-year Treasury bonds exceeds that of 10-year Treasury bonds, the warning light of the U.S. economic recession will continue to flash. Historically, this indicator has been a reliable recession signal, and in the eyes of some economists, this time may be no different.
In addition, based on historical standards, US stock valuations are also at high levels, indicating future downward trends. Stovall pointed out that the current P/E ratio of the S&P 500 index is 32% higher than the average P/E ratio in the past 20 years. At the same time, the stock price P/E ratio of technology stocks that have dominated the market in recent years is also 68% higher than the average level of the past 20 years.
"I think we are really in a dilemma. In order to balance this point (high valuation), we have to upwardly adjust our profit expectations."
Could cracks appear in US technology stocks?
Stovall pointed out that the valuation of large US technology stocks is too high. In the future, US technology stocks may be about to see the first crack in the iceberg.
"Only technology stocks have outperformed the U.S. market. I think the US stock market is a large jet plane that flies only with one engine. Just think about how long it can fly in the air."
Although bullish voices still dominate on Wall Street, other forecasters warn that as US stocks (especially technology stocks) continue to rise, there is limited room for market growth.
Legendary investor John Hussman, who has successfully predicted two stock market crashes, warns that according to a valuation index, US stocks appear to be the most overvalued since 1929. This may pave the way for a sharp stock market correction.
Editor / jayden