Stifel Chief Stock Strategist: Investor Over-Optimism May Have Negative Impact

In early September, the US stock market performed strongly, but as the end of the month approached, the market became more stable. However, Stifel's Chief Equity Strategist Barry Bannister warned that investors' excessive optimism in the fourth quarter could have negative consequences. On Thursday, the market once again had a good day, with both the Dow Jones Industrial Average and the S&P 500 reaching new highs for 2024, marking the 28th and 39th historic closing highs of the year respectively. The Nasdaq Composite Index also surged, recording its largest one-day gain since August 8th. So far, the three major indices have risen more than 1% in September, erasing the losses from the beginning of the month. The Fed recently announced a 50 basis point rate cut, and many strategists expect the market to continue to rise in the future, partly due to the ongoing push of artificial intelligence and the relatively robust economic performance. However, Bannister remains cautious. He believes that while market optimism can be alluring, the reality may be more inclined to lead to a pullback in the S&P 500 to around 5000 points in the fourth quarter. Bannister pointed out that while the fiscal and monetary policies during the COVID-19 pandemic may seem like a thing of the past, the impact of stimulus measures still lingers. Although the general public has already spent the funds during the pandemic, the enterprises that benefited from it continue to invest. However, Bannister warned that the market is filled with speculative sentiment, and investors' expectations for the future have become disconnected from reality. He specifically mentioned that the 12-month trailing price-to-earnings ratio of the S&P 500 has exceeded 26 times, approaching the highest levels in nearly a century. Additionally, while the difference in compound annual growth rates between large-cap growth stocks and value stocks may seem like a boon brought about by the artificial intelligence revolution, history shows that such a peak often heralds a recession and bear market, a pattern that has persisted over the past 90 years. Bannister is also concerned that although the US economy has seen growth in labor supply, the decline in labor demand is another warning sign of economic recession. He questions whether the post-election market rally (due to political uncertainty being resolved) that many anticipate will not be sustained, especially if the Fed does not take further action. Furthermore, he believes there is a discrepancy in the market's risk assessment of tech stocks that are driving the stock market higher. He points out that investors seem to have forgotten the dangers of a bubble burst, and the current situation bears similarities to the tech bubble of the 1990s. Moreover, Bannister predicts through mathematical models that the S&P 500's compound annual real total return rate over the next decade (including stock price changes and dividend reinvestment, adjusted for annual inflation) will be close to 3%, with a nominal return rate of 6%. While Bannister's pessimistic view may be in the minority in the current market, he is not alone. Some other analysts also believe that investors' expectations are too high, while the economic backdrop remains weak. Just a few weeks ago, the market was concerned about the economy, the semiconductor industry, and the outlook of the presidential election. While a significant market downturn seems unlikely at the moment, there are still uncertainties, at least until November 5th.