It's not exactly a surprise — there are a number of signs pointing to historic overextension not only at the top of the indexes, but throughout much of the market. And just as the laws of physics dictate how high something can be built without buckling over, there are loose axioms around how overextended valuations can get. Without the buttress of low yields as the economy recovers, price multiples are looking as if they're on an unstable foundation.
These market axioms are based on precedent. And for Jonathan Coleman, a small- and mid-cap portfolio manager at Janus Henderson, which manages $364 billion in assets, the past is illustrating how extreme investor euphoria — and the valuations it is pushing up — currently are.
10-year Treasury yields have risen to their highest levels since before the pandemic in recent days.
James McDonald, CIO at Hercules Investments, told Insider he expects yields to continue rising.
He said they could rise to 2.5% by the end of March and trigger a 20% sell-off in the S&P 500.
Yields on 10-year Treasury notes have spiked to a one-year high over the last month, rising above 1.5% as COVID-19 cases fall and vaccinations continue — positive developments for the economic recovery ahead.
According to James McDonald, chief investment officer of the alternative asset manager Hercules Investments, the bleeding isn't likely to stop anytime in the coming weeks.
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Economist David Rosenberg is warning that the S&P 500 is due for lackluster returns this year.
He said the S&P 500's most expensive stocks could see a median 30% drop, like in the dot-com bubble.
He laid out in several charts how extreme investor euphoria has become.
Investor euphoria has seemed to reach a particular level of bizarreness this year.
Stock indices are at all-time-highs despite an uneven economic recovery and the risk that new strains of COVID-19 may prolong the global pandemic.
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In an exclusive interview with Insider, Ray Dalio said he expects a period of weak returns in stocks.
He said low interest rates are fueling a bubble that will eventually burst.
Major Wall Street banks are bullish on the direction of equity markets, however.
With the Federal Reserve pinning down interest rates, return-hungry investors have turned to stocks for the income bonds would have provided in a different era. But with all of this appreciation in stocks, little upside potential remains, according to legendary investor Ray Dalio.
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John Hussman is calling for a 65-70% drop in the S&P 500.
He says he sees "fresh deterioration" in a key market indicator.
His comments come as stocks sit at record highs amid euphoric investor sentiment.
Investors are by now conscious of the heightened risk of a stock-market pullback in the near future, given the euphoric speculation that has continued to drive valuations upwards.
Eighty-nine percent of financial professionals surveyed by Deutsche Bank earlier this month said that they saw bubbles in financial markets, and Bank of America and Charles Schwab both recently warned that investor sentiment is approaching extremes, making stocks vulnerable to a sell-off.
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Bank of America's "Bull & Bear" indicator showed sentiment climbed on a 1-10 scale to 7.1 last week from 6.7 on December 17.
This prompted Bank of America's chief investment strategist, Michael Hartnett, to say in a January 7 note that investors were rationalizing "increasingly irrational price action on Wall St."
Hartnett laid out six warning signs to watch that could signal a bear market is beginning.
Investor sentiment has climbed from rock bottom in March to what is now approaching extremes on the other end of the spectrum — and it's starting to worry Bank of America's top strategist.
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Market strategist Sven Henrich, who warned of the crash before it occurred in February 2020, says "we are staring at the largest valuations and technical disconnects ever."
He said the difference between current price levels and exponential moving averages shows stocks are again due for a pullback.
On February 20 last year, right at the market's top, Sven Henrich reiterated a warning.
"From my perch this market is the most dangerous we've seen since 2000," Henrich, the founder of NorthmanTrader, wrote in a post on his site.
Over the course of the following month, the market would go on to shed 35% of its value as the global pandemic worsened.