In Some Analysts' Views, The Stock Market Is 'Running Out of Steam'

In some analysts' views, despite the S&P 500 has risen more than 24% this year, the main drivers behind this surge are nearing exhaustion. Therefore, future U.S. stock investment returns will be significantly reduced.

David Rosenberg, who accurately predicted the U.S. housing bubble and is a former Chief North American Analyst at Merrill Lynch, is one of those analysts holding these opinions. In a report on Wednesday, he warned that investors should prepare in advance, as the upward potential of the U.S. stock market in the coming period may be limited.

Rosenberg paid special attention to recent factors such as U.S. stock valuations, interest rates, and tax cuts, believing that the "momentum" driving U.S. stocks upward has almost run out.

He believes that the favorable forces driving the recent rise in U.S. stocks have almost been depleted, which could put downward pressure on corporate earnings, thereby affecting stock prices.

U.S. stock valuations are already high

Rosenberg pointed out that the forward price-to-earnings ratio of the S&P 500 index is 22.3 times, more than one standard deviation above its historical long-term level, the highest level since the peak of the technology bubble after the outbreak of the COVID-19 pandemic in 2021.

With U.S. stock valuations already so high, the extremely bullish sentiment in U.S. stocks has even exceeded the level before the financial crisis. In Rosenberg's view, this means that there is little room for further increase in U.S. stock valuations.

Rosenberg believes that if U.S. stock valuations want to improve further, they will largely need the continued growth of corporate earnings, but he said there are reasons to believe this is unlikely to happen.

Limited room for Trump's tax cuts

Over the past few decades, the corporate tax rate in the U.S. has been declining, which has boosted corporate profits and helped push up stock prices.

Although the market widely bet on Trump's tax cut plan to further improve corporate profitability after he won the election, Rosenberg believes the market may be too optimistic about the prospects for rate cuts.

He pointed out that the tax rate faced by U.S. companies is already very low, which means there is not much room for further tax cuts. Secondly, as of now, according to predictions from Reuters and other media, the Republicans have only obtained 218 votes in the House of Representatives, a slim majority, which means Trump's tax cut bill may not pass smoothly in Congress.

"A razor-thin majority in the House and already low rates mean the runway is much shorter here as well, said Rosenberg, given that the actual corporate tax rate in the U.S. is only 17%, even if the Republicans can control both the White House and Congress, there is almost no room for further reduction in U.S. tax rates."

Uncertain prospects for Fed rate cuts

For a long time, rate cuts by the Federal Reserve have helped to push up the stock market, but this round of rate cuts may also be shorter than many people think.

Although the Federal Reserve is cutting rates, Rosenberg believes that in the long term, Federal Reserve rates are already close to historical lows, indicating that there is not much room for rates to fall further—especially if President-elect Trump implements tax cuts and raises tariffs, which will further raise inflation, making it more difficult for the Federal Reserve to cut rates.

"Interest rates, though higher than the 2021 lows, still are at the lower end of the historic range. The current 10-year Treasury yield, at 4.3%, is less than half of the 10.6% average in the 1980s."

In summary, Rosenberg believes that unless the impact of future tax cuts and rate cuts on corporate operating profits in the U.S. rises significantly, the stock market is unlikely to rise sharply in the future.