Friday's Market Minute: The Most Expensive Bull Cycle Yet?

The S&P 500 recently achieved a milestone within this ‘bear market’ cycle by surpassing the 4,200 level (4198.05), a level we have not reached since a brief roundtrip in August of the previous year. The frenzy surrounding A.I. has completely transformed the market, with nearly every single conference call this earnings season emphasizing how A.I. will enhance companies' efficiency and productivity. It appears that investors are anticipating an immediate impact from this development.

 Currently, at these new price levels, the S&P 500 is trading at a 19.50 12-month forward multiple. For context, the 12-month forward P/E low for 2021 was at 19.90, while the high for 2018 was 19.88. Both of these values were set against a backdrop of historically low interest rates and the expansion of fiscal and monetary policy. In the current environment, the cost of capital has increased by over 5% on a Federal Funds basis. This doesn't take into account the tightening in credit markets due to the recent 'mini banking crisis'. The relative performance between the S&P 500 and the S&P Equal Weight Index is at its lowest level since the market peak on January 4th, 2022, suggesting that this rally is being driven by only a few large-cap stocks.

Goldman Sachs estimates that A.I. could augment S&P 500 profits by 30% over the next decade. Assuming compounding returns, this equates to roughly a 2.6% annual "boost" to SPX earnings. This anticipated increase in earnings is already reflected in the price moves of companies such as Nvidia NVDA, Microsoft MSFT, and Alphabet GOOGL, among others. 

The question for investors now is whether this emergent A.I. trend will be the catalyst to lift us out of the current downturn, much like the Bitcoin/Blockchain trend during the COVID low, high beta stocks during the 2009 frenzy, or the housing boom following the internet bust. 

If so, this could signify the beginning of a costly new cycle, potentially rendering traditional fundamental indicators such as The Conference Board Leading Indicators Index, Services and Manufacturing PMIs, or even the time-tested 3-month/10-year treasury spread (or 2-year/10-year spread) obsolete. If that is the case, FOMO may creep back into the marketplace, causing heavily short position concentrations, like Leveraged Funds positioning in the E-mini S&P 500, to reverse course, creating a domino effect of upward momentum.

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