Source: Wall Street See

After six consecutive weeks of gains, the S&P 500 index has achieved its strongest year-to-date performance since 1997.

Meanwhile, last Thursday the U.S. investment-grade credit spread reached its lowest level since 2005, and the spread between Italian and German 10-year government bonds narrowed to the lowest level since November 2021.

As the market gradually digests these strong performances, can the future rebound continue?

deutsche bank analyst Henry Allen pointed out in a research report on the 21st that the current market rebound may face four major obstacles, including overvaluation, saturation of growth expectations, geopolitical risks, and public debt issues. Investors need to remain highly vigilant.

Deutsche Bank believes that the S&P 500 index is expected to achieve annual gains of over 20% for two consecutive years, a first since 1997-98; however, considering the four obstacles mentioned above, despite the strong fundamentals of the global economy, given the recent market rebound momentum and the headwinds that are about to emerge, caution is still necessary.

Obstacle 1: Traditional valuation indicators are too high

Deutsche Bank pointed out that the second round of bull market this year has been strong, marking the first time since 1997-98 that the S&P 500 index has maintained an annual increase of over 20%.

However, despite the strong market performance, traditional valuation indicators have issued warning signals. The S&P 500 index's price-earnings ratio and other valuation indicators are currently at historical highs, reaching similar levels only twice in the past century, both times occurring before significant market downturns:

The first time was before the bursting of the internet bubble in 2000, when the S&P 500 index fell for three consecutive years.

The second time was after the rebound following the 2021 pandemic, with the market experiencing a significant decline in 2022.

The valuation levels in this rebound are approaching those of the internet bubble period, indicating that the market may have priced ahead. Deutsche Bank's analysis suggests that if the market does not have stronger fundamental support, there may be a risk of a pullback in the future. This means that even though the market may still maintain its upward trajectory in the short term, historical experience shows that the current valuation levels are difficult to sustain in the long term.

Barrier Two: Growth expectations reaching saturation, making it difficult for economic growth surprises to reappear.

In addition to valuation concerns, Deutsche Bank also warned that the market's expectations for economic growth are already very optimistic, making it difficult for more "growth surprises" to emerge in the future.

In 2023 and 2024, the global economy performed better than expected, especially with the USA's economic growth surpassing earlier market expectations. The economic growth forecast for the USA in 2024 has been revised up from 1% last year to 2.6%, which is a positive signal for the market.

However, Deutsche Bank pointed out that as the market's expectations of a soft landing have already been fully reflected in prices, there is limited further upside potential in the future. The continued upward movement of the market partly depends on the sustained better-than-expected performance of economic data, and once the momentum of exceeding expectations weakens, investors' optimism may be dampened, even triggering a new round of market volatility.

"Therefore, considering that risk assets have been continuously supported by unexpected economic growth in recent years, it is not so clear where the next round of boost will come from.

Obstacle 3: Escalation of geopolitical conflicts, stock market faces downside risks

Geopolitical risks remain one of the significant challenges in the current market. Deutsche Bank specifically mentioned the tense situation in the Middle East, particularly the recent escalation of conflicts between Israel and Iran, leading to significant oil price fluctuations.

Deutsche Bank believes that a significant increase in oil prices may not only have a negative impact on global economic recovery, but also trigger an increase in market inflation expectations, thereby exacerbating stagflation risks.

Historical experience shows that stagflation risks usually pose significant pressure on the stock market and other risky assets, potentially leading to a significant market pullback.

Barrier 4: Rising global public debt levels and increasing debt burden

Finally, the fourth major obstacle mentioned by Deutsche Bank is the continuous increase in global public debt levels.

According to the latest report from the International Monetary Fund (IMF), global public debt is forecasted to exceed $100 trillion by 2024 and continue to rise into the late 2020s. The U.S. fiscal deficit is expected to remain between 7% and 9% during the period from 2026 to 2028, far above historical normal levels.

Deutsche Bank points out that this high level of deficit is rare in history:

"Until the 2020s, the only period the U.S. had a 6% deficit was during major wars (U.S. Civil War, World War I, and World War II) or major economic shocks (global financial crisis and the COVID-19 pandemic)."

Not only the U.S., major European economies such as France have not achieved a fiscal surplus since 1974, making debt issues a potential market risk globally.

Despite the current market's relatively calm response to high debt levels, Deutsche Bank warns that events such as the European sovereign debt crisis suggest that the market's reaction to debt issues is often non-linear, and its critical points are not always clear in advance. With the increasing debt levels, this is likely to become an area of increasing concern in the coming years.

Editor / jayden