Those who follow the developments in international markets have noticed an impressive recovery in stocks, resistant to any unpleasant news – economic, corporate, geopolitical. The US, Europe, Japan and India see their indices on a steady and concerted upward trajectory, breaking one record after another. A global party is underway – even if the background music is war marches and precision blues.
O S&P 500 – the most representative indicator of Wall Street, which also guides other markets around the world – is galloping. It is moving at historically high levels, having strengthened by 60% since 2022. The euphoria surrounding technology (especially the achievements of artificial intelligence) is the main fuel for this race. That is why there are many who do it. comparisons to the dot-com bubble era.
There are many differences from this period 24-25 years ago. But that doesn’t mean the party can last forever. So what could possibly be the thing that would shorten it?
The bells for violent correction
Very recently, its analysts Goldman Sachs they published a note under the title “Summer Blues”in which they warned that stock prices have risen excessively, especially when compared to bond performance, despite the fact that risks to the economy and corporate profits have increased. Therefore, the correction could be imminent and painful.
At the same wavelength and JPMorgan Chase, speaks of overly aggressive moves by buyers, based on unrealistic estimates of business growth and profitability. “Such excesses tend to be followed by violent correction,” warn analysts at the investment house.
Mike Wilson sees a 10% correction on his part Morgan Stanley, who a few months ago defended the maintenance of the shares.
One indicator that analysts have been watching consistently is the cyclically adjusted price-to-earnings ratio. It’s about it the so-called cover index, Who jumped to 36. The only time it was louder was near climax. of the dot.com bubble and in 2021. Both times, a free fall followed. In India, valuations rose to even more exorbitant levels. In Europe and Japan, they are somewhat more moderate, although unusually high compared with the average of recent years.
In such an environment, what could signal the shift from recovery to sell-off? “A change in investor sentiment,” Goldman warns, is enough. And what could trigger the sudden change in mood? There are two big fears.
The two great fears
The first has to do with a geopolitical shock. A rapid deterioration of developments on the Ukraine or Middle East front – something that would lead to a regional or even global conflict. A China-Taiwan conflict, which would bring the US face to face with another superpower. An ignition between the West and the forces that challenge it.
The second has to do with a potential financial shock. Here, attention and concerns are focused on the so-called shadow banking sector, which has grown dangerously but is not subject to the same supervision and strict requirements as traditional banks.
“A lot of people I talk to are extremely worried,” Torsten Schlock, chief economist at Apollo Global Management, told the Economist. “The bubble is getting bigger and bigger. And what could happen is that with the first negative development, we see everyone running for the exit door at the same time.” The last one will also turn off the lights.