Unprecedented Optimism: Is This the Most Disliked Bull Market in History?

Veteran investor Edward Yardeni

The stock market rally in the US that started in mid-October has sparked a debate among investors, with veteran Edward Yardeni suggesting in a recent note that it may go down in history as one of the most disliked bull markets. Despite headwinds such as the continuing Russia-Ukraine war, high inflation, soaring interest rates, and concerns of an impending recession, major indices such as the S&P 500 and Nasdaq 100 have surged significantly.

The S&P 500 has gained more than 20 percent from its October 12 low, while the Nasdaq 100 is up almost 40 percent. Many investors believe the current rally isn't a new bull market, but a bear market rally.

Yardeni presented four compelling reasons for this rally to be met with disapproval by investors who are bearish on the market.

Yardeni emphasised that the current bull market started with elevated valuations rather than attractive lows often seen at the end of bear markets. During the fourth quarter of 2022, the S&P 500 traded at a forward price-to-earnings ratio that exceeded its 25-year average, indicating that investors missed out on potentially opportune moments to buy during the recent bear market. This discrepancy in valuation resulted in many investors feeling left out and skeptical of the rally's sustainability.

Despite a constant stream of recession-related headlines since mid-October, the stock market defied such expectations and continued its upward trajectory. Even concerns expressed by prominent CEOs and business leaders about an imminent recession failed to dampen the bullish spirit. Yardeni pointed out the audacity of the bull market as it charged ahead while the consensus opinion aligns with the belief that a recession is just around the corner.

The stock market remained unfazed by the downfall of three major banks—Silicon Valley Bank, Signature Bank, and First Republic Bank. These bank failures rivalled the scale of those during the 2008 crisis, with billions of dollars in assets at stake. Remarkably, the S&P 500 continued its ascent even after the banking crisis started on March 8, 2023. This surprising resilience raised eyebrows and contributed to the market's divisive nature.

Critics of the rally pointed to the overwhelming influence of mega-cap tech stocks, which limited the participation of smaller companies in the S&P 500. The declining ratio of equal-weighted to market-cap-weighted S&P 500 serves as evidence of this trend, leading to concerns about market breadth.

Yardeni highlighted that many non-tech stocks have also reached record highs recently. Additionally, positive earnings forecast revisions suggest that the market’s strength extends beyond the mega-cap tech sector.

Yardeni maintained a bullish outlook on the rally, primarily due to the anticipated integration of artificial intelligence, robotics, and automation. He said this technological revolution will usher in a productivity boom by enhancing the efficiency of the human mind, contrasting with past productivity booms driven by physical strength. Consequently, Yardeni posits that all companies are poised to become technology companies, bolstering his conviction in the ongoing bull market.