Although U.S. stocks are continuously setting new historical records, the Wall Street analysts covering these stocks have not rushed to chase this rally. Data shows that individual stock researchers, who almost always predict rising stock prices, are currently downgrading their expectations for S&P 500 constituents faster than they are upgrading them—only the second time this has occurred since the Iran war broke out. Data from Jefferies LLC also indicates that among the broader Russell 3000 index, the proportion of stocks with a “buy” rating is nearly unchanged from four years ago and remains far below the peak seen during the dot-com bubble. The ticker symbol for the S&P 500 is SPX.
Whatever the exact reasons for this emerging skepticism, the market widely views it as a healthy development. From a contrarian investment perspective, it suggests that market sentiment is far from the frenzied levels that typically signal a market top. Andrew Greenebaum, Senior Vice President of Equity Research Product Management at Jefferies, says he prefers to gauge market sentiment by “whether there are more incremental buyers or sellers,” and that sell-side analysts currently show no signs of capitulating to the bull market.
According to LPL Financial, since mid-April, driven by expectations of a potential peace agreement in the Iran situation and enthusiasm over the profit potential of artificial intelligence (AI) technology, the S&P 500 has been hitting record highs. The index has posted nine consecutive weeks of gains, rising 20% over that period—the strongest winning streak for such a duration in 75 years. Despite overbought conditions flashing warning signals and the rally remaining narrow in participation, there are currently few signs of outright mania.
Furthermore, the latest survey from the American Association of Individual Investors (AAII) shows that the number of bears continues to outnumber the bulls.
For Greenebaum, the current situation has produced “the most reluctant rally in a long time.” Of course, the lack of frenzy does not guarantee the rally will continue, especially as other warning signs accumulate. U.S. stock valuations remain elevated overall, and tech stock concentration has reached extreme levels.
Dan Suzuki, Global Investment Strategist at iCapital, points out that while Wall Street strategists and analysts may remain cautious, other indicators reflect rising risk appetite. U.S. households’ actual equity allocations are at record levels, and retail investors have recently increased their purchases of leveraged equity-linked products. Suzuki notes that the current market bullishness is largely dominated by AI bulls, as this sector boasts the strongest earnings growth and momentum, and optimism outside of this trade is clearly unevenly distributed.
