Sustained bull market or bubble? Analysts divided as US shares point to soft landing

An unusually long winning streak in US shares is focusing attention on the possibility of a sustained bull market.

US Federal Reserve board chair Jerome Powell. Picture: Getty Images

An unusually long winning streak in US shares is focusing attention on the possibility of a sustained bull market coinciding with a soft landing and further upside from the AI boom.

As the Federal Reserve announced a widely expected increase in the Fed funds rate to a two-decade high range of 5.25-5.0 per cent and chair Powell said Fed staff no longer expected a recession, the DJIA rose for a 13th consecutive day.

This represented its longest consecutive daily rise since January 1987.

In the four other times in history in which the blue-chip index rose for 12 or more consecutive sessions, the index logged a median gain of 13 per cent in the year following, according to Dow Jones Market Data. At the same time, the S&P 500 has gone 43 consecutive days without a 1 per cent fall, its longest streak of that kind since the 74 days ending 24th January 2020, when the pandemic began.

Of course the sharemarket won’t necessarily follow historical patterns.

JPMorgan said the US share market rally over the past two months implies macroeconomic scenarios that are “even more positive than a soft landing”, mainly due to investors “mechanically” taking more risk because of lower volatility and the “emergence of the AI-themed mega cap rally”.

With the level and increase of stock concentration in the S&P 500 now at 60-year highs, JPM warns this “could be indicative of a bubble” and anecdotal evidence “point to an AI-driven bubble”.

“While we think AI has been and will continue to be a transformative technology, the current hype was triggered by popularisation of chatbots that often fail in basic questions and occasionally fabricate wrong answers to more complex questions,” JPMorgan global head of macro quantitative and derivatives research Marko Kolanovic said.

“We remain of the view that the delayed impact of the global interest rate shock, steady erosion of consumer savings and post-Covid pent up demand, and deeply troubling global geopolitical context will result in market declines and re-emergence of market volatility.

Bell Potter head of institutional sales and trading Richard Coppleson.

“We acknowledge that we cannot time this inflection near term, but there are no data points that would prompt us to change our methodology or conclusions.”

Still, after looking at the last 18 times that the DJIA has risen 11 days straight, Bell Potter head of institutional sales and trading Richard Coppleson found the index was higher in the next six months 89 per cent of the time, with an average gain of 3.9 per cent.

Apart from the two times when the DJIA was lower after six months – when the Covid-19 pandemic started and when aggressive US interest rate hikes started – he found that the index was higher after six months 100 per cent of the time, by an average of 6.6 per cent.

“Don’t forget almost all of these gains have come during very worrying and stressful times in markets where all the bears have said to sell and stay out of stocks,” Mr Coppleson said.

With the S&P 500 now in a “bull market” – defined as a rise of at least 20 per cent without a fall of at least 20 per cent – Mr Coppleson also found that the average gain of S&P 500 bull markets since 1928 has been 114 per cent over 1011 calendar days.

“For this bull to get to the average bull, the S&P 500 would need to gain another 68 per cent from here, taking it to 7670 points, over a period that takes us out to July 2025,” he said.

Meanwhile, the Australian sharemarket is starting to embrace the possibility of a soft economic landing here as inflation falls faster than expected and China plans fresh economic stimulus.

The S&P/ASX 200 index surged to a five-month high off 7472.3 points this week after lower-than-expected inflation data and commodity price gains after supportive comments from China.

Goldman Sachs said Australia’s favourable macro over the past month reinforced the prospect of a soft-landing domestically although one more interest rate hike was likely.

“We continue to view doomsday recessionary scenarios as misplaced and believe Australia is on course for a soft-landing,” Goldman Sachs Australia chief economist Andrew Boak said.

In recent weeks his proprietary economic data surprise indicator has risen to its highest point in a year, amid positive jobs, retail, building approvals, housing finance, and business conditions data.

His current activity indicator shows growth is running at a below-trend pace of about 1.5 per cent annualised, which compares favourably to global peers, even as inflation is coming down.

But underlying services inflation is still tracking above 6 per cent in terms of annualised growth.

Sizeable annual increases in prices for electricity, health insurance, the minimum wage, and ongoing strong growth in residential rents are likely to keep services inflation elevated in the second half.

And alongside services inflation, the unemployment rate fell to a near 50-year low, even after RBA deputy governor Michele Bullock recently stressed the need to see progress in labour market normalisation.

But Morgan Stanley said Australian corporate earnings estimates have “rolled over”.

“As it sits now, our top down models predict further downside within Industrials – a key area of aggregate earnings risk with cash rate sensitive sectors most in focus,” Morgan Stanley Australia equity strategist Chris Nicol said.

Macquarie Group was the latest to disappoint with a weak first quarter 2024 trading update.

Originally published as Sustained bull market or bubble? Analysts divided as US shares point to soft landing