The recent rampage of U.S. stocks has led many investors to fear the current rise is just another bubble. However, Bank of America points out that there is almost no evidence to support these concerns.
Led by Savita Subramanian, Bank of America strategists said in their latest report that, despite the strong rise in U.S. stocks since last year, they have not reflected the situations that appeared in previous boom and bust cycles, such as the huge disparity between stock prices and their values, or the large-scale use of leverage.
The S&P 500 Index slightly fell on Monday, continuing last week's decline, as traders remained vigilant about critical inflation data on Tuesday. The market will focus on whether consumer price pressures are still stubborn, which may further delay the timeline for the Fed to lower interest rates.
This situation could also exacerbate concerns that the U.S. stock market, which has risen in 16 of the past 19 weeks and hit a series of historical highs, makes it look like a giant bubble. According to Deutsche Bank, the US stock market has risen so quickly in a four-month window only twice since World War II.
The bank explained that except for the recovery after the recession, it was only during the Internet bubble of the late 90s when U.S. stocks soared, but the rise proved to be unsustainable.
However, Bank of America strategists pointed out that listed company earnings are strong, the economy is resilient, and the stock market has more room to grow. Last week, it raised its year-end target for the S&P 500 Index to 5,400 points, currently the highest on Wall Street, suggesting over a 5% increase from current levels.
Sentiment has warmed up on equities since mid-2023, driving our slightly lower level of conviction in an upmarket, but is nowhere near bullish levels of prior market peaks. They wrote.
While Wall Street is concerned that investor sentiment has become overly optimistic, Bank of America's sell-side indicators suggests that investor sentiment remains in a neutral zone, like in the 1995 internet bubble expansion, rather than the crazy bullish of 1999 when the bubble was near to burst.
Subramanian believes that bull markets end with widespread optimism. He said that the current frenzy is limited to certain themes, such as Artificial Intelligence and GLP-1 weight-loss drugs.
In fact, it's not just Bank of America, recently more and more strategists are playing down concerns about bubbles.
Mislav Matejka of JPMorgan Chase & Co. said in a report issued on Monday that, compared to other constituent stocks of the S&P 500 Index, the valuations of the seven tech giants driving the stock market rise are still below the five-year average levels.
Meanwhile, strategists at Goldman Sachs Group Inc. said last week that, although market concentration has reached the highest levels in decades, the valuations of top companies are far lower than their counterparts in the tech bubble peak.
Subramanian, of Bank of America, was among the first sell-side strategists to reverse their negative views of the stock market last year. In his view, despite market-to-book ratios demonstrating a disconnection of price from value, the S&P 500 Index, excluding the tech seven giants, is closer to its long-term average level.