It might not be today, it might not be tomorrow, but at some point, this bull market is going to end.
So far, the roaring bull market that began in late 2022 has overcome every obstacle in its path. But since the start of the second quarter, skeptics have identified a number of warning signs that are making them increasingly uncomfortable. Some Wall Street veterans, including Michael Hartnett, a strategist at BofA Global Research, think the stock market has reached the late innings of the market cycle.
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The S&P 500 Index SPX was up 28.2% on Tuesday from a year ago, while the Nasdaq Composite Index COMP was 40.8% higher and the Dow Jones Industrial Average DJIA was up 21.3%, according to FactSet.
Over the past couple of weeks, investor sentiment, positioning and expectations surrounding the pace of growth for corporate profits have all reached levels that look extreme relative to history, Hartnett pointed out in commentary recently shared with MarketWatch. A lopsided rally has left the market dangerously dependent on hot tech and AI-linked names. Although some beaten-down software stocks have staged a strong recovery, many other hard-hit industry groups have continued to struggle.
All of this is happening as investors face what Stephen Innes, managing partner at SPI Asset Management, described as a unique combination of risks in the months ahead. Accelerating inflation, shifting central-bank policy and a coming torrent of equity issuance, with the expected IPOs of SpaceX, Anthropic and OpenAI, could work together to dampen demand for stocks. And once a selloff really gets going, it could snowball.
BofA’s Hartnett is of the view that the stock market is caught up in a bubble, and that it will end badly for investors. Many disagree, arguing that aggressive expectations for earnings growth can in part justify the parabolic move higher in semiconductor names and other hot stocks. Fortunately, if Hartnett is proven correct, investors still have a pretty clear road map for how they can minimize their losses — if history is any guide.
Hartnett offers his post-bubble investor road map since 1929, which is long bonds, and long a combination of defensives and/or sectors that “dramatically underperformed in the last months of the bubble,” Hartnett wrote in a recent report.
