(Bloomberg) — The stock market’s rally to record highs heading into this week’s Federal Reserve meeting has some of Wall Street’s biggest optimists growing concerned that the good vibes are sending a contrarian signal.
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After a three-week advance, the S&P 500 Index is up about 19% since late October, and by one measure investors are as bullish as they’ve been since 2021. It all raises the stakes for Wednesday’s Fed decision, as traders are betting on a quicker pace of easing than the central bank has signaled. That puts added focus on Chair Jerome Powell’s press conference and any roadmap he provides for when officials will begin lowering rates from the highest in more than two decades.
“It’s going to be tough for stocks the next few months because the dialog for equities will be focused on what framework the Fed will use for cutting interest rates,” Thomas Lee, head of research at Fundstrat Global Advisors and a leading stock-market bull, said by phone. “That will create a lot of anxiousness for investors.”
It promises to be a massive week on multiple fronts. Hours before the Fed decision, the Treasury will announce its quarterly borrowing plans. Another boost in bond sales is expected. That risks driving up yields and pressuring growth stocks in particular, as the present value of their future profits is worth less as long-term rates rise. Meanwhile, five Big Tech companies with a combined market value of more than $10 trillion will report results, including Apple Inc., Microsoft Corp. and Alphabet Inc.
Lee sees the S&P 500 possibly touching 5,000 soon — some 2% above its current level — then falling as much as 7% from its peak in the coming months. He then expects it to bounce back in the second half of 2024 once the Fed’s likely easing begins.
Meanwhile, another well-known bull, Ed Yardeni of Yardeni Research, has grown skeptical about the prospect of near-term equity gains after a key sentiment gauge hit its highest level in more than two years.
Read more: Ed Yardeni Is Getting Nervous About the Speed of S&P 500’s Rally
In the week through Jan. 23, a ratio of bulls to bears identified in an Investors Intelligence survey of newsletter writers was hovering at the highest since 2021, when stocks neared a prior peak before the 2022 bear market, Yardeni Research analysis shows. Another signal of elevated bullishness was evident in a weekly survey of retail investors by the American Association of Individual Investors.
Those measures, coupled with increases in bond yields and the dollar in the past month, have Lee concluding the stock market may be nearing its peak for the first half of 2024.
That’s notable because Lee has been among Wall Street’s staunchest bulls since the market bottomed in October 2022, with his 2024 year-end S&P 500 target of 5,200 — roughly 6% above Friday’s close — around the highest of nearly two dozen strategist projections compiled by Bloomberg. Yardeni’s 2024 and 2025 year-end price targets are 5,400 and 6,000, respectively.
Solid Economy
With that said, the US economy remains resilient and continues to defy recession worries, with robust consumer spending and ebbing inflation powering growth and bolstering the outlook for Corporate America.
Such strength implies policymakers will be in no rush to cut rates. In swaps markets, bets on a quarter-point reduction in the federal funds target this quarter have ebbed to about 50%, from over 70% a month ago. Traders are now leaning toward the first cut potentially coming in May.
While investor confidence has been building, one corner of the market suggests it isn’t overextended. Leveraged long exchange-traded funds — which use swaps or derivatives to amplify daily index returns — aren’t showing anywhere near the enthusiasm they did in 2021’s meme-stock mania.
The spread of long-to-short leveraged ETF trading, historically a strong indicator of marking tops and bottoms in stocks, favors bulls, but it sits well below where it was in December 2021 right before the S&P 500 peaked, according to Bloomberg Intelligence.
That’s encouraging for stock enthusiasts since it suggests that confidence isn’t at euphoric levels that would threaten to upend the current bull run in the S&P 500, according to Athanasios Psarofagis, an ETF analyst at BI.
“We’re still not seeing a parabolic move in stock sentiment,” he said. “There’s still room for investors to get more bullish throughout this year even if equities hit a roadblock soon.”
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