07.03.202413:14 Forex Analysis & Reviews: S&P 500's bubble to burst soon?

With the S&P 500 up 25% since November, making its 15th all-time high since the start of the year, and stock market capitalization increasing by $8 trillion in four months, we're wondering if there's a bubble going on. This is what JP Morgan thinks. Goldman Sachs, on the other hand, believes the stock index rally rests on solid fundamentals and upgraded its year-end forecast to 5,200. Simply because the previous estimate of 5,100 had already been exceeded. Bank of America predicts the mark 5,400.

It is generally accepted in the market that the main characteristic of a bubble is too many bulls or bears. Thus, at the peak of the economic crisis of 2008-2009, the number of sellers went through the roof. Currently, despite all the successes of the S&P 500, the army of buyers, according to surveys by the American Association of Individual Investors, is by no means at extreme levels.

Balance of bulls and bears on Wall Street

The main drivers of the rally of the benchmark stock index are expectations of the Fed's monetary easing and the amazing resistance of the American economy to aggressive monetary tightening. The Federal Reserve raised interest rates 11 times and brought them to a 23-year peak. However, GDP growth of 3.2% in the fourth quarter and impressive gains in US nonfarm payrolls suggest the economy has maintained its momentum.

It is curious that signs of its cooling in the form of weak data on business activity in the services sector from the ISM triggered a pullback in the S&P 500. That is, the factor of American exceptionalism for the stock index is more important than the Fed's intention to ease monetary policy. It is not surprising that the stock market actually ignored Jerome Powell's testimony before the US Congress.

He stated that monetary expansion will take place in 2024. The Federal Reserve is not afraid of strong statistics on the labor market and high inflation for December-January. He just wants more similar data to begin the process of lowering the federal funds rate. This rather dovish rhetoric knocked down the US dollar, but the S&P 500 remained resilient. The Fed doesn't seem concerned about improving financial conditions, which not only creates a tailwind for the stock market but could also lead to inflation acceleration.

Dynamics of S&P 500 and financial conditions in US

The response of the S&P 500 to the release of US employment data for February is difficult to predict. Strong statistics will indicate a healthy economy, which will allow the stock index to rise. On the contrary, signs of a slowdown in GDP are fraught with its fall. Although in this case, expectations for a Fed rate cut may shift to April, which will support the stock market.

Technically, the reversal pattern of Three Indians is in progress on the daily chart of the S&P 500. To activate it, the price must fall below the minimum level of the second Indian. Fair value is also found there. Thus, a breakout of 5,088 is a reason to sell.