Rosenberg Research: What, Me Worry?
Markets remain near all-time highs, and will likely hit new all-time highs again before the year is out. The past few weeks have seen a rotation from big-cap tech stocks into smaller-cap stocks. Typically, bull markets start off with smaller-cap stocks trending higher. This market rally has been different.
Plus, with earnings on big-tech stocks soaring thanks to demand for AI, market valuations don’t look stretched. We’re nowhere near the levels of overvaluation seen during the dotcom boom.
However, the past year’s stock surge has been partly earnings growth. But the largest bulk of the move is simply earnings expansion. In other words, investors are simply willing to pay more for stocks on average.
Meanwhile, individual households now have about 70% of their balance sheet in equities. That’s a far cry beyond the 60/40 model. The 60/40 split balances the long-term growth in stocks with the stability of bonds.
While markets can continue higher, the easiest money in the rally has likely been made. And seeing further massive gains from here looks unlikely.
Investors taking a strategic approach may want to trim tech positions on a rally. The profits can sit in cash earning high interest right now. Or it can go into long-term bonds, which should rally as interest rates decline later in the year.
For now, market valuations aren’t a red flag. But they’re a yellow one. Even if small caps are finally rallying too.