The American stock market continues to set new highs, despite weak consumer sentiment and a disconnect between stock performance and the state of the economy. Analysts at Bravos Research note that in the past, such periods of growth have always ended under the same macro conditions.
We explain what factor is at play and why it is important not only for the stock market but also for the crypto market.
What is happening in the U.S. stock market
In their analysis, Bravos Research notes a sharp increase in speculative activity. The daily trading volume of options on the American market has reached $3.5 trillion. This volume is comparable to the combined market capitalization of all companies in the Russell 2000 index and indicates a massive use of short-term and high-risk strategies.
At the same time, margin debt on the New York Stock Exchange is growing. Its volume has reached $1.2 trillion, increasing by approximately 45% over the past year. Similar growth rates were previously recorded only in 2008 and 2021, shortly before periods of serious market turbulence.
Against this backdrop, the S&P 500 index has risen by 235% over the past ten years. Historically, such returns are extremely rare and were previously observed in the late 1920s, early 1960s, and during the dot-com bubble in the late 1990s.
Why the market is rising despite consumer sentiment
Bravos Research notes a significant divergence between market behavior and the real economy. Data from the University of Michigan shows that consumer sentiment in the U.S. remains among the weakest in the last 70 years. The rising cost of living continues to pressure households, despite the strong dynamics of the stock market.
In previous periods of high ten-year yields, stocks rose amid consumer confidence in the future of the economy. The current situation deviates from this pattern. In the face of weak sentiment, the market continues to move upward, while investors increase risk in an effort to maintain participation in the rally.
The role of expectations
According to analysts, the market's resilience is largely explained by expectations of corporate profits. Wall Street is pricing in about 18% average annual growth in profits for S&P 500 companies over the next five years. This figure is nearly double the long-term average.
A limited number of the largest tech companies make the main contribution to such forecasts. The revenue growth of Nvidia, Microsoft, Amazon, Google, and Meta is linked to the development of AI, cloud services, semiconductors, and digital advertising. Such dynamics reflect poorly on the state of consumer demand in the U.S. economy.
Investors take this imbalance into account, which is why the largest tech companies have the greatest weight in the index and the highest valuations. Bravos Research emphasizes that such a market structure may persist as long as profit expectations are justified.
The market is becoming vulnerable
High expectations for profit growth lead to rising valuations. The forward P/E ratio for the S&P 500 has approached levels last seen during the dot-com bubble.
A similar situation makes the market sensitive to any changes in forecasts. A decrease in profit expectations can quickly increase pressure on stocks. Analysts at Bravos Research emphasize that a high valuation is not, in itself, a trigger for the end of a bull market.
The main macro factor that would end bull markets
A key conclusion from Bravos Research is that all major bear markets over the past 70 years occurred under conditions of inflation above 3.5%. In several cases, including 1987, 1999, and 2022, it was the rise in inflation that marked the end of prolonged stock market growth.
An exception was the crash of 2020 caused by the pandemic, when inflation remained below this level.
Inflation directly affects interest rates and liquidity. Rising prices force central banks to tighten monetary policy. Financial conditions become tighter, and the inflow of capital into risk assets decreases.
According to Bravos Research, the current bull market in stocks is unlikely to end until inflation turns upward.
What does crypto have to do with it
The same logic applies to the crypto market, as it largely mirrors the stock market. Bitcoin and altcoins are sensitive to global liquidity and interest rate expectations. As long as inflation remains under control, the conditions for the growth of risk assets, including cryptocurrencies, remain.
Historically, phases of active risk in the stock market have been accompanied by capital inflows into crypto. Investors willing to take on increased risk in stocks and derivatives are more likely to expand their exposure to digital assets.
The scenario of reversing inflation carries key risks for the crypto market as well. Rising prices could force regulators to tighten policies again, leading to simultaneous pressure on stocks and cryptocurrencies. In such a case, Bitcoin is likely to continue behaving as a risk asset rather than a safe haven.
The dynamics of inflation remain the main macro indicator for participants in the crypto market. As long as the figure does not exceed critical levels, the scenario of continued growth described by Bravos Research formally remains.
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