Top strategist warns that stocks are displaying characteristics of past bubbles due to the Federal Reserve’s loose approach to liquidity

Top strategist warns that stocks are displaying characteristics of past bubbles due to the Federal Reserve’s loose approach to liquidity

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  • The stock market has similarities to historical asset bubbles, warned SocGen’s Albert Edwards.

  • This could be a sign that the Fed’s monetary policy is not tight enough, he said.

  • The Wall Street bear has been warning for months of a recession and a coming stock market correction.

Stocks reflect historic bubbles, with the Fed’s monetary policy not being as tight as markets think, according to Albert Edwards, global strategist at Societe Generale.

Edwards, who is currently among the most bearish forecasters on Wall Street, highlighted the sharp rise in stocks over the past year, with the S&P 500 gaining 27% from its October 2022 low.

But the surge in stock prices could be a warning that the Fed’s monetary policy is too loose, he warned, emphasizing the central bank balance sheet reductions and expectations of a Fed rate cut later this year, which would ease financial conditions.

This may explain why the S&P 500 has recorded a series of records this yearand why the total money supply — a measure of the economy’s liquidity — has jumped 10% over the past year, according to Federal Reserve data.

“The current narrative focuses on the anticipation of an increase in corporate profits due to AI to fully justify the current stratospheric valuations. Those of us who lived through the TMT bubble of the late 1990s have already heard all this and rolled their eyes,” Edwards said. in a note last week. “The Fed may have been playing the liquidity game last year,” he added.

Investors have steered the bull market on the tail of the so-called “AI revolution“, but Edwards says there are signs that analyst optimism and corporate earnings expectations are starting to slow. The percentage of analyst estimate changes that constitute improvements has fallen below 50% in the S&P Composite Index, he noted.

“All I can say is that the fact that analyst optimism on the S&P 500 only reached a peak of 50% before falling back is not the prerogative of a cyclical recovery normal, let alone a ‘new era’ of AI,” Edwards warned. “Is this anemic earnings environment really consistent with the S&P rising by a third in a year? Maybe this is all due to Fed-induced liquidity after all?!”

Edwards, who was one of the few on Wall Street to predict the Internet crash, has been warning for years that stocks could be in a similar bubble, especially amid the market frenzy for artificial intelligence. This suggests that stocks could be built up to a major correctionespecially if the The United States falls into recessionhe had warned before.

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