Top economists: The three major driving forces of the U.S. stock market bull market are running out

The main driving factors behind the significant rise in the stock market over the past thirty years are nearing extremes, indicating that future returns will be significantly lower.

This is the view of David Rosenberg, president of Rosenberg Research and a top economist in the United States. In a report on Wednesday, he warned clients to prepare for limited appreciation in the U.S. stock market for some time.

"The momentum in the stock market is running out," he said.

Rosenberg is particularly focused on the latest trends in valuation, taxation, and interest rates. According to him, the favorable conditions of these factors have reached extremes, which could put downward pressure on corporate earnings and, in turn, weigh on stock prices.

Here are three factors that concern Rosenberg.

Stock Valuation

Rosenberg pointed out that the forward price-to-earnings ratio of the S&P 500 index is 22.3 times, which is more than one standard deviation above its historical norm and the highest level since the peak of the tech bubble during the COVID-19 pandemic in 2021.

Such a high valuation, combined with extremely bullish sentiment that has surpassed pre-financial crisis levels, leads Rosenberg to believe that there is little room for further valuation increases.

"There is no further expansion space," he said.

Higher stock market valuations largely depend on sustained growth in corporate earnings, but Rosenberg stated that there is reason to believe this is unlikely.

Taxation

For decades, the corporate tax rate in the United States has been declining, which has boosted corporate profits and helped drive up stock prices.

The "Trump trade" will largely depend on potential legislation to lower the corporate tax rate from 21% to 15%, but Rosenberg believes this is unlikely to happen.

Rosenberg said, "The slim Republican majority in the House and the already low tax rates mean that this upward momentum is also much more limited."

Rosenberg believes that given the current effective corporate tax rate of 17%, there is almost no room for further declines, even if the Republicans control the White House and Congress.

Interest Rates

For a long time, declining interest rates have helped drive the stock market up, but this trend may also be nearing its end.

While the Federal Reserve is cutting interest rates, rates are already close to historical lows, indicating that there is not much room for further declines, especially given that the agenda of elected President Trump is inflationary.

"Although interest rates are higher than the lows of 2021, they are still at the lower end of the historical range. The current yield on the 10-year U.S. Treasury bond is 4.3%, which is less than half of the average level of 10.6% in the 1980s," Rosenberg said.

In summary, Rosenberg stated that unless there is a significant increase in operating profits excluding the impact of taxes and interest expenses, the stock market is unlikely to see significant gains in the future. Rosenberg said, "In addition, with consumers increasingly focused on costs and net profit margins at the high end of historical ranges, creating higher profit margins seems to be a daunting task."

He added, "Currently, all three drivers of price returns are close to their limits."