It’s Possible to be Too Merry and Bright Heading into the Holiday Season
The question is timely, given the recent surge in investor enthusiasm towards equities and the return of traders to grab for the raciest assets. The key is distinguishing between a bull market fueled by rational fundamental positives and one that has grown so frisky as to be acutely risky.
Despite the warning signs of frothy markets, the S&P 500 is showing no signs of ending its upcycle just yet. In fact, flows into equity ETFs have surged, reaching a monthly record in November and amounting to more than a quarter of a trillion dollars over the past three months. Wall Street strategists are also bullish, with many projecting a winning 2025 with prices ranging from 7% to 15% above current levels.
However, some investors are sounding the alarm, pointing to signs of excess and risk-taking, such as high-velocity trading indicators and the rising demand for downside index protection through put options. Others, like David Rosenberg, are acknowledging that the market’s growth may be more sustainable than expected.
The BlackRock Investment Institute adds that the current environment is one of permanent change, with megatrends like the rise of artificial intelligence transforming economies. While this could lead to a risk of over-trading, the BlackRock team believes that financial markets will work to rein in policy extremes, creating the potential for risk appetite to become frothy.
The S&P 500 is currently trading within the top decile of 12-month price momentum, and its recent outperformance has led to a broadening of earnings growth. While some signs of froth are present, it’s not clear that we’re at an extreme, unlike the 2021 tech-and-meme-stock mania.
While some caution is warranted, the current market environment is likely to continue, driven by the strong economic fundamentals and technological investment boom. As such, investors can assume that some excuse for a gut check will come around before too long, but there’s no need to bet aggressively against the market.