Stifel Chief Stock Strategist: Investor Overly Optimistic Sentiment May Have Negative Impact

In early September, the U.S. stock market showed strong performance, but as the end of the month approached, the market stabilized. However, according to the financial news app "Zhītōng Cáijīng," Stifel's chief equity strategist Barry Bannister warned that investors' excessive optimism in the fourth quarter could have negative consequences.

On Thursday, the market once again had a good day, with both the Dow Jones Industrial Average and the S&P 500 hitting new highs for 2024, marking the 28th and 39th historic closing highs of the year, respectively. The Nasdaq Composite Index also surged, recording its largest single-day gain since August 8. As of now, the three major stock indexes have risen by over 1% in September, erasing the losses from the beginning of the month.

The Federal Reserve recently announced a 50 basis point rate cut, and many strategists expect the market to continue to rise in the future, partly due to the ongoing momentum in artificial intelligence and the relatively robust economic performance. However, Bannister remains cautious. He believes that although the market's optimism can be enticing, the reality may lean towards a pullback in the S&P 500 to around 5000 points in the fourth quarter.

Bannister pointed out that although the fiscal and monetary policies during the COVID-19 pandemic seem to be in the past, the effects of stimulus measures still linger. While ordinary people have already spent the funds from the pandemic period, the companies that benefited from it continue to invest. However, Bannister warned that the market is filled with speculative sentiment, and investors' expectations for the future have become detached from reality.

He specifically mentioned that the 12-month trailing P/E ratio of the S&P 500 has exceeded 26 times, nearing the highest level in a century. Moreover, the gap between large-cap growth stocks and value stocks, although seemingly a positive outcome of the artificial intelligence revolution, historically indicates that such a trend peak often precedes a recession and a bear market, as it has been for the past 90 years.

Bannister is also concerned that while the U.S. economy has seen growth in labor supply, the decline in labor demand is another warning sign of an economic downturn. He questions whether the expected post-election market rally (due to political uncertainty being resolved) will be sustainable, especially without further action from the Federal Reserve.

Furthermore, he believes that there is a risk misassessment in the market regarding the tech stocks that are driving the stock market higher. He points out that investors seem to have forgotten the danger of a bubble burst, and the current situation bears similarities to the tech bubble of the 1990s. Additionally, Bannister predicts through mathematical models that the S&P 500's future ten-year compound annual real total return (including stock price changes and dividend reinvestment, minus annual inflation rate) will be close to 3%, with a nominal return rate of 6%.

While Bannister's pessimistic view is in the minority in the current market, he is not alone. Some other analysts also believe that investors' expectations are too high, while the economic backdrop remains weak. Just a few weeks ago, the market was concerned about the economy, the semiconductor industry, and the outlook for the presidential election. At present, the likelihood of a significant market decline seems low, but there are many variables, and at least until November 5, this uncertainty will persist