US stocks soar, but warning signs remain

Since 2025, driven by a tech boom and loose monetary policy, the US stock market has repeatedly reached new highs, with the S&P 500 and Nasdaq indices continuing to climb, and market sentiment is optimistic. However, beneath this seemingly buoyant US stock market, undercurrents surge, potentially triggering significant volatility.

Historical experience shows that rising inflation is often accompanied by surging corporate costs and declining profit margins. While the US economy currently appears resilient, supply chain bottlenecks and labor shortages persist. Goldman Sachs analysts point to a sharp narrowing of corporate financing spreads in 2024, suggesting that institutional investors are accelerating their sell-off of stocks to avoid risk. Howard Marks, founder of Oaktree Capital, warns that the S&P 500's price-to-earnings ratio of 22 is approaching its historical high, and that high valuations could imply returns hovering between 2% and -2% over the next decade. The combination of pressure on corporate profits and frothy valuations could pose hidden risks for the market. Furthermore, Goldman Sachs traders warned that tariffs could cause core inflation to rise by 0.5 percentage points. If inflation persists, the Federal Reserve may be forced to maintain high interest rates, significantly increasing the risk of stagflation. The struggle between costs and profits is becoming a sword of Damocles hanging over the market.

Bank of America's Contrarian Sentiment Index (SSI) shows that Wall Street optimism has reached a nearly two-and-a-half-year peak. Sell-side analysts are generally bullish, while buy-side funds are cautiously reducing their holdings. This divergence often signals the risk of overheating in the market. In early 2022, the SSI also hit a high, followed by a sharp correction in US stocks. The current market frenzy for technology stocks, particularly those driven inflated by short squeezes, has led Goldman Sachs trader Louis Miller to bluntly state that these stocks lack fundamental support and present significant downside risks.

UBS warned that the US economy faces three major risks: recession, resurgent inflation, and geopolitical instability. The lagged effects of the Fed's aggressive rate hikes, combined with dwindling household cash buffers, could lead to economic weakness in the second half of the year. At the same time, cracks are emerging in the job market. Data from the New York Federal Reserve shows that the probability of re-employment for unemployed workers is only 45%, a record low. This indicator suggests a decline in labor market flexibility, putting pressure on consumption and economic growth potential. A sharp rise in the unemployment rate would overturn optimistic market expectations and trigger a sell-off. Furthermore, geopolitical tensions in the Middle East and trade uncertainty persist, raising the risk of tariffs that could impact corporate profits and global growth, further exacerbating recession expectations.

The Federal Reserve's monetary policy path is highly uncertain. The market is betting on interest rate cuts to support the stock market, but if economic data exceeds expectations, tightening policy could backfire. Current CME data shows that investors expect three rate cuts before the end of the year, but Goldman Sachs emphasizes that economic resilience may lead to disappointing rate cut expectations, and upward pressure on interest rates will weaken support for the stock market. History shows that Fed policy shifts are often accompanied by significant market volatility. The tightening cycle following the 2021 "flooding" policy has triggered multiple pullbacks.

The current boom in the US stock market is based on multiple risks, and investors must be wary of the lesson that "it's cold at the top." History has repeatedly proven that overheated markets, valuation bubbles, economic uncertainty, and policy shifts are often precursors to sharp declines. Investors are advised to rationally assess risks, pay attention to corporate earnings quality and changes in economic data, and avoid blindly chasing high prices. Amidst the AI ​​wave and monetary policy, only a return to fundamentals can help us navigate the fog of market cycles. As Max said, "Investment returns are closely linked to price; ignoring valuation will ultimately come at a cost."