Various record-breaking increases, are US stocks overheated?

With a series of economic data once again boosting expectations of a rate cut by the Federal Reserve, the US stock market has hit new highs.

Overnight, all three major US indexes closed up by over 1%, with the S&P 500 breaking through 5600 points for the first time in history. Both the S&P and Nasdaq 100 have hit new highs for six consecutive days, while the Nasdaq has hit a new closing high for seven consecutive days.

The rally is still being driven by tech giants. Since Apple's WWDC24, its stock price has risen by 18% cumulatively, hitting a historic high overnight. Tesla has risen for 11 consecutive days, with a cumulative increase of over 44%, and TSMC's stock price has also repeatedly hit historic highs.

Concerns about a bubble are rising in the face of strong leadership from tech stocks.

Some institutions have conducted fundamental analysis comparing the current US stock market with the dot-com bubble period. Firstly, they compared the stock price performance between Cisco, Intel, Microsoft, Oracle in the lead-up to the dot-com bubble in 2000 and Nvidia in the past five years:

The chart shows that Nvidia's average daily increase over the past five years far exceeds the average of the other four companies.

Another indicator of bubble signs is that in the past six months, the S&P 500, weighted by market cap, has significantly outperformed the equal-weighted S&P 500, indicating a high concentration of gains in heavyweight stocks. This phenomenon last occurred in late March 2000.

Historical performance of these two indicators suggests a pullback is imminent.

Furthermore, the Buffett Indicator (total stock market cap/GDP) has risen to a historical high of 195%, surpassing levels seen during the 2000 dot-com bubble, the 2008 financial crisis, and the 2022 bear market, indicating that the US stock market is significantly overheated.

In addition to fundamental indicators showing an overheated stock market, the support of liquidity for risk assets is also weakening.

Data shows that as of mid-June this year, after a rebound in corporate tax payments (transferred to the Treasury General Account) and the use of quarterly-end RRP (Fed's overnight reverse repo agreements), reserve levels have declined.

Citibank has also pointed out that the correlation between central bank liquidity and risk assets globally remains in negative territory.

In terms of market sentiment, while it has not yet reached the level of "extreme overheating," it is still dangerous enough.

Goldman Sachs analysis pointed out that the AI ​​boom may boost the stock market, and still favors the tech giants that have experienced previous uptrends:

"Currently, the market positioning, profit expectations, and valuations are high, while the breadth is low, and the speed at which economic data 'spoils' is more like milk than wine. However, the growth of artificial intelligence and the strong financial resources of the baby boomer generation can serve as a support for growth."