SPY's V-Shape Rebound Pushes Valuation to Unsustainable Levels: Rating Downgrade

The S&P 500 Index (SP500) has rallied over 20% from its intraday low on April 7. This V-shape rebound has pushed valuation back to unsustainable levels. Despite the strong rebound, investors should remain cautious and consider rating the SPY down.

The S&P 500 Index (SP500) has staged a remarkable rebound, surging over 20% from its April 7 intraday low. This V-shaped recovery has propelled the index back to within striking distance of its record high, reaching levels that were previously considered unsustainable. However, despite the impressive rally, investors are advised to remain cautious and consider rating the SPY down.

The S&P 500 was pushed to the brink of a bear market in April, falling nearly 19% from its February peak. The index has since rebounded strongly, driven by a combination of factors including a stronger-than-expected May jobs report and optimism over U.S.-China trade talks. As of June 10, the S&P 500 was just 1.7% below its all-time high of 6,144.15, set on February 19 [1].

Market strategists caution that investors should not be lulled into a sense of complacency. While the index has recovered swiftly, the underlying risks that led to the April selloff have not entirely dissipated. Key concerns such as elevated stock valuations, ongoing trade uncertainty, and downward earnings revisions remain [1]. Additionally, the market's reliance on fundamentals for further gains is a significant factor, as technical factors have already facilitated the initial recovery [1].

Morgan Stanley's Mike Wilson highlights a bullish signal in the form of improving earnings revisions breadth. The proportion of analysts raising their earnings estimates has increased, with the indicator now at -10% compared to -25% during the height of tariff uncertainty in April. This improvement suggests that sentiment is recovering, and the market is more focused on forward-looking earnings revisions rather than backward-looking hard data [2].

However, the recent optimism might be a potential headwind for further equity gains. Contrarianism has historically been a good investment philosophy, and extreme bullishness often precedes downward movement in the stock market. The current market sentiment, while improved, is not yet at a bullish extreme, suggesting that investors should remain vigilant [1].

In conclusion, while the S&P 500's rapid recovery is impressive, investors should approach the current valuation levels with caution. The unsustainable levels reached by the index warrant a cautious stance, and investors are advised to consider rating the SPY down. The market's reliance on fundamentals and the potential for further earnings revisions breadth improvement provide a basis for optimism, but the underlying risks should not be overlooked.

References:
[1] https://www.morningstar.com/news/marketwatch/20250610135/the-sp-500-is-nearly-back-to-record-highs-but-investors-shouldnt-get-too-comfortable
[2] https://ca.finance.yahoo.com/news/morgan-stanley-shares-chart-fuels-024927365.html