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Is The U.S. Stock Market Becoming A Bubble?

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The commercial real estate market is basically in ashes, regional banks’ paper losses continue to grow, yet Wall Street hits record highs with the S&P 500 breaking through the 5,000-point barrier for the first time in history.

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Is the US stock market becoming an unsustainable bubble?

The first thing to say is that the index has recently risen mainly on the back of the magnificent seven.

It should, therefore, come as no surprise that, although the S&P 500 index has outperformed the end-2024 targets set by many analysts, it is crucial to recognise that the equally weighted index is behind its all-time high.

Moreover, only half of the stocks in the S&P 500 have posted growth this year, and the Russell 2000, which represents US small companies, is currently 20% below its 2021 high.

Turning to the outlook for the future, the trajectory of the US stock market and its bullishness in the form of a magnificent seven-year period depends on money and psychology.

As for the former, many rely on the fact that as of mid-December 2023, US money market funds alone held almost $6 trillion in assets, an increase of more than 60% since December 2019, just before the pandemic.

The implication should be that a substantial amount of money is still ready to enter the market.

The problem is that the mutual fund liquidity level could be higher than market capitalisation.

It should also be noted that the significant exodus of money market funds may move markets less than bulls expect, as many investors may want to rebalance from cash to bonds.

In other words, it remains uncertain whether cash-seeking higher yields will move into shorter-term bonds due to attractive yield levels or flow into equities.

As for the psychological factor, much depends on the pace of future Fed actions, the persistence of inflationary pressures, and risks to economic growth.

As for the regulator’s next moves, a relatively inflationary ISM services report caused traders to reduce bets on multiple Fed rate cuts, strengthening the US dollar.

On the other hand, Fed members stuck to their hard line, resisting any easing of monetary policy, which could exacerbate regional banks’ paper losses.

 

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