S&P 500 Marks New All-Time Highs; Wall Street analysts see a downturn on the horizon

The US stock market is sailing to new all-time highs amid concerns about the impact artificial intelligence may have on corporations and expectations that the Federal Reserve will cut interest rates, which would reduce funding costs and would increase company valuations.

But, voices on Wall Street appreciate that stocks are overvalued, the market's rise is led by only a few big names in technology and the macroeconomic context is more unfavorable for stocks than it may appear at first glance, elements that can lead to a correction or even a fall higher of the market.

• Stiefel's Chief Equity Strategist Sees 10% Correction for S&P 500 Amid US Stagflation and No Interest Rate Cuts in Second Half of Year

Barry Bannister, chief equity strategist at US investment bank Stifel, believes that uncertain economic and monetary policy may cause stocks to drop 10%, writes Business Insider.

"Extremely high valuations are about to collide with a picture of a weakened economy, which may bring losses to investors as early as this summer," the strategist said in an interview with Yahoo Finance last week. "We are concerned that, given the current high level, future yields will be reduced. Overpaying today is the best way to have low returns in the long run."

In Bannister's estimate, which is based on calculations using the stock market risk premium, the S&P 500 appears to be about 10% overvalued. Other measures of valuation, such as the share of total household assets, are also at record levels, according to the strategist.

In his opinion, inflation will be higher than expected in the second half of the year, and economic development below estimates. US GDP growth slowed to 1.4% in the first quarter, according to the latest data, while inflation remains high at 3.3% in May, well above the Federal Reserve's long-term price target, of 2%.

But the economic slowdown and high prices mirror the recession of the 1970s, some Wall Street veterans warn, when stocks underperformed. In addition, high inflation is weighing on the prospect of Fed rate cuts, which spells bad news for stocks, with the US central bank now likely to be unable to cut interest rates this year, even as markets expect two, according to Business Insider.

"Therefore, the market can pull back ... I wouldn't be disappointed if it were down 10% to around 4,900 (n.r. of points)," Bannister said. "For someone more optimistic, maybe it would be good to think about the fourth quarter, but I would be cautious", the strategist pointed out, according to the mentioned source.

• The top ten largest stocks in the S&P 500 account for about 35% of the entire index, the largest share ever, according to Apollo Academy

Richard Bernstein, chief investment officer of Richard Bernstein Advisors, believes that large-cap stocks, the category that includes the big names in technology, are vastly overvalued and poised for a fall, according to Business Insider.

In a note to clients in the middle of last month, Bernstein noted that only a small group of stocks are supporting the market, but the big leaders' profits today will diminish and future returns will be reduced.

According to an analysis by the Apollo Academy, the top ten stocks in the S&P 500 represent about 35% of the entire index, the largest share ever recorded, Business Insider notes. In a worst-case scenario, Bernstein believes the most overvalued stocks in the index could drop 50 percent, generating losses that would rival the dot-com crash.

"That's what I think we're looking at," Bernstein said. "Several years of significantly reduced performance". But this can be a great opportunity for investors who are diversified into other areas of the market, according to the investment firm's chief executive, who has a bullish outlook for almost every other area of the stock market except for the top seven valuation companies. stock market, which have grown largely on the back of excitement generated by artificial intelligence.

• One of the characteristic signals of a speculative bubble, i.e. too loose a monetary policy, has not yet appeared, according to UBS

The team at UBS believes that the market is giving signals that a speculative bubble is forming, according to Business Insider.

According to the bank's strategists, there are eight signs warning of the formation of a bubble in the stock market, and six have already appeared, including increasing pressure on corporate profits, supporting the appreciation of quotes by only a few companies or aggressive buying by retail investors.

"Bubbles tend to occur when stock returns have been very high relative to bond returns, and investors extrapolate historical returns as predictive of future returns - when, in fact, future returns are significantly below the norm," he wrote. UBS strategist Andrew Garthwaite in a note from early June.

On the other hand, one of the characteristic signals of a bubble, namely an overly relaxed monetary policy, has not appeared yet, given that the Federal Reserve has not started to cut interest rates.

• Evercore: "The artificial intelligence revolution is in its early stages, which should lead to a continuous increase in companies' profits"

Not all Wall Street strategists believe a correction or even a steeper market decline will follow.

Evercore CEO Julian Emanuel recently raised his year-end S&P 500 estimate to 6,000 from 4,500 previously. It's a 9.5% target above the stock basket's level from the latter part of last week.

According to the strategist's note from the second part of last month, "the artificial intelligence revolution is in the early stages", which should lead to a continuous increase in the profits of companies, according to Business Insider.

For the Evercore executive, in his bull scenario, in which investors would be swept up in the exuberance of the dot-com bubble, the S&P 500 index could rise to 6,500 points by the end of 2024.

"The shares are far from "bubble territory", but quick profits and abundant liquidity in a period when earnings are growing can "inflate" the index to 6,500 points", said Emanuel, quoted by the American publication.