(Bloomberg) — The S&P 500 index has likely recorded most of the gains it will see this year as investors grow increasingly nervous about high valuations in the stock market, according to the latest Bloomberg Markets Live Pulse survey.
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The 2024 rally, which propelled the U.S. equity benchmark to 31 record closing highs, left the asset class more overvalued than U.S. credit or gold, a majority of the 586 respondents said. After climbing around 50% since October 2022, driven by technology stocks, the bull market has achieved growth greater than the median of its predecessors dating back to 1957.
Investors aren’t looking to hit the sell button just yet, but signs of nervousness are evident: About half of those surveyed say stocks will see the start of a correction of at least 10% this year, and 35 % of them say it will happen in 2025. This general sense of caution is also apparent in the options market, where traders have built hedges against potential losses in technology stocks.
As the economy and profits continue to grow and cash flows through the financial system, most survey participants believe there is room for additional gains this year, but only by a modest amount. The survey’s median projection is for the S&P 500 to end 2024 at 5,606, nearly 3% above Friday’s close. That’s a more encouraging view than the median goal among Wall Street strategists, which is for the index to be little changed from current year-end levels.
About three-quarters of participants say they will maintain or increase their exposure to the S&P 500 over the next month. It makes sense to ride the bullish wave at the moment, Ed Clissold and Thanh Nguyen of Ned Davis Research wrote in a June 20 note. They have doubts as the year progresses, however, given all the questions investors will face in the second half, around areas as important as Federal Reserve policy and the U.S. election. “Maintain an overweight position in equities for now,” they write. . “But prepare for more defensive positioning, potentially in the third quarter.”
To measure high stock valuations, JonesTrading’s Michael O’Rourke points to the market capitalization of the S&P 500 relative to the size of the economy. Since around 1990, this ratio has only been higher when stocks have surged in 2021.
“We are in a bubble and there is a huge risk that the economy will end up slowing in the second half and that multiples will contract,” said O’Rourke, the firm’s chief market strategist. “These are very dangerous levels for long-term investors buying stocks.”
Artificial intelligence, a key driver of the market’s nearly 15% advance this year, is seen as the most likely trigger for a selloff, with 31% of respondents on alert for a negative surprise on this front.
Tech stocks in the so-called Magnificent Seven basket — led by AI darling Nvidia Corp. — dominated earnings growth, although their influence is expected to diminish in coming months, according to Bloomberg Intelligence analysis. .
Concerns around the economy are also a priority. Some 27% of respondents said stocks could fall as unemployment rises, while nearly a quarter highlighted the risk of a surprise rise in inflation that would keep the Fed on hold for longer.
The unemployment rate reached 4% in May, the highest since early 2022. Economists at Goldman Sachs Group Inc. have warned that the labor market is at a potential “inflection point,” where any further slowdown in the demand for workers will affect jobs, not just employment. openings.
“The overall economic conditions are confusing,” Kim Forrest, chief investment officer at Bokeh Capital Partners, said by email. “Inflation appears to be easing, but employment appears to be slowing. »
Despite all the reasons for concern in the months ahead, the survey also contains potentially more optimistic signals.
On the one hand, participants predict that oil prices should end 2024 around $80 for WTI futures, exactly at Friday’s levels.
The lopsided rally in stocks has also created significant market distortions. Value stocks, for example, are historically cheap relative to their growth counterparts and the market as a whole, and for 40% of survey participants, they now appear to be the biggest bargain among U.S. stocks. Next are small caps and the S&P 500 with equal weighting.
“We could see the market rise by the end of the year, if we avoid a recession – which I think is very likely,” said Forrest of Bokeh Capital. “And it all depends on the outlook for 2025, as we approach the end of the year. »
The MLIV Pulse survey was conducted June 17-21 among Bloomberg News terminal readers and online readers around the world who chose to participate in the survey, and included portfolio managers, economists and investors individuals. Terminal readers can subscribe to future surveys here.
This story was produced with help from Bloomberg Automation
–With the help of Vildana Hajric.
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