The AI-driven stock market rally that began in November 2022 shows signs of fading as euphoria and speculative retail flows echo late-1990s excess. The S&P 500 reached repeated all-time highs while trading at roughly 26.05 times trailing earnings, increasing concerns about overbought conditions. Tariffs, elevated inflation, and a stronger-than-expected Producer Price Index have unsettled the Federal Reserve and could reduce the number of planned rate cuts. Inflation remains materially above the Fed's 2% target. A September rate cut is widely anticipated, but the timing of subsequent cuts may hinge on the August jobs report and evolving economic data. Consumers and businesses currently appear in decent financial shape, with higher stock portfolios and home prices compared with 2008.
All the signs that the long AI-driven stock market rally that started in November 2022, with the debut of ChatGPT, is almost out of steam are beginning to show up everywhere. While we have seen a strong move off the April lows, euphoria and a landslide of momentum, and retail investors' cash has poured into some of the most speculative corners of the stock market, reminding Wall Street veterans of the late 1990s and the dot-com implosion.
With the S&P 500 clicking off all-time highs until just recently, seemingly every week despite trading at 26.05 times trailing earnings, many feel that the combination of tariffs, the market being way overbought, and the fact that the Federal Reserve has been spooked by the recent Producer Price Index, and may tap the brakes on multiple rate cuts this year.
While the equal-weighted S&P 500 has broadened out some this year, which is a huge positive, it could be time for the market to take a breather after the frantic late winter and spring rally. One positive is that consumers and businesses are generally in reasonably good financial shape, at least for now. Stock portfolios and home prices have increased dramatically over the past few years, and the economic system is not teetering on the abyss as it was globally in 2008
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