What’s going on here?
Bank of America is warning about a froth building in US stocks and crypto – with both markets starting to look overvalued.
What does this mean?
Markets love being the main character. Just check out the S&P 500: it’s eye-wateringly expensive. But hey, when you’ve racked up a 27% gain this year and have left the rest of the world eating your dust, maybe you just get used to your own high valuations. Or look at bitcoin: it certainly doesn’t seem to be fretting about whether its current rally has gone too far. The OG crypto’s market capitalization is now the size of the world’s 11th-biggest economy. Now the eternal optimists will tell you these aren’t bubbles. And Bank of America’s global “bull/bear” gauge seems to agree: it shows that investors are still more bear cub than raging, shares-grabbing bull. But that may be more due to bearishness outside of the US than inside. It’s why one of the bank’s top strategists, Michael Hartnett, just made his fears known: he’s warning that, while US stocks could gain another 10% over the next few months, they’re already dangerously frothy. And we know how that generally ends.
Why should I care?
For markets: Adios, US exceptionalism.
Bank of America’s crystal ball sees US stock exceptionalism peaking in the next few months, with the big US index likely to be brought to heel as a stronger US dollar makes those stocks more expensive for foreign buyers. Meanwhile, lower interest rates and more government stimulus elsewhere could make European stocks and emerging market assets more appealing So you might want to think about diversification sooner rather than later, then.
The bigger picture: The alphas wait their turn.
US stocks are priced as if nothing could possibly go wrong. Of course, that doesn’t mean another blockbuster year is in the cards. Instead, it suggests that any hiccup in the rosy outlook could spark big downward moves. Active investors might be secretly rejoicing: after years of watching markets “buy the S&P 500 and chill”, they’ve been looking for a market shake-up so they can make money from the opportunities it presents.
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Originally Posted December 6, 2024 – Bubbling Up
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