The S&P 500 index of the top U.S. shares suffered three weak days and needs the Friday bounce to hold or risk a correction.
SPX 500 – Daily Chart
The SPX 500 was able to shake off three consecutive days of selling with support at the 6,600 level. The market will now look to target the highs once more ahead of the 6,700.
U.S. stock market valuations have now hit their highest level ever, when dating back to 1900. Bloomberg reported that the combined pricing metrics of companies have surpassed the bubble highs of 1929 and 2017. That is a dangerous place for long positions in the market to be.
There has been some concern about valuations in recent weeks, especially with the recent comments from Fed Chair Powell, who hinted at overvalued stock markets. Another risk for the U.S. is the recent weakness in the labour market and whether it will filter down into consumer spending in the coming months.
“I do get a little bit more nervous just about the straight upward momentum in the market,” said Anthony Saglimbene at Ameriprise Financial. “The market is trading at levels that any kind of unexpected hiccup could cause a near-term dislocation”.
Inflation remains above the Fed’s 2% target, and Powell has highlighted this in recent talks. Meanwhile, “we still haven’t seen the full impact of tariffs yet on end consumer prices,” said Allen Bond, portfolio manager at Jensen Investment.
If tariffs do feed into further inflation, “then the dovish Fed support may goes away,” Bond added.
With the Fed telegraphing continued inflation and lofty stock valuations, the market would need a new catalyst to extend the rally further. If the market cannot get above 6,700, then it could lead to a sharp correction into year-end.
