Is S&P 500 in a bubble zone? JP Morgan says the index's rally is at risk

US stock market, S&P 500 rally: In the past four months, there has been an impressive rally in the US benchmark index, the S&P BSE 500. The index, which is widely regarded as the best single gauge of large-cap US equities, has jumped over 20 per cent since November 2023 (from 4,200 to 5,111), according to Zee Business Research.

It includes 500 leading companies in the US and covers approximately 80 per cent of the available market capitalisation. The headline index hit a new high of 5,111 on February 23, thanks to the continuous good performance of S&P 500 companies and their encouraging guidance. The index's one-month return stands at 5 per cent while the three-month return is 11 per cent.

However, global brokerages are divided on the S&P 500's outlook. Barclays, for instance, is positive on the index and has increased its target for 2024 to 5,300 levels from the previous 4,800 mark. JP Morgan, on the other hand, says that the rally is at risk.

The analysts at the brokerage firm note that relaxed financial, labour, and government costs will keep inflation at elevated levels. They also note that the Fed will keep the higher interest rates intact. The brokerage further warns that there is a possibility of 1970-like stagflation. In 1970, the equity market was steady, while there was a rally in the bond market. 

Given this scenario, there could be an impact on asset allocation, JP Morgan notes. It further highlights that there is a macroeconomic risk due to the presidential elections in the US due in November. It also added that the market is unlikely to see any jumps due to the elections.

Meanwhile, Barclays is of the view that Big Tech will continue to rally and inflation will normalise with time. The brokerage has increased the index's target, keeping in mind that the US economy will look beyond the headwind of heightened interest rates. It estimates the S&P 500's FY24 earnings per share (EPS) at $235. On $252 EPS, the index's target is set at 6050, the brokerage adds.

What does history say?

History suggests that the S&P 500 is not in a bubble zone. In the past 3 years, the headline index has given a 31 per cent return. This is its long-term average return. Historical data suggests that the index crashes when it gives returns of around 100 per cent in three years. Hence, the index is nowhere near those levels, notes the Zee Business Research desk. 

It must be noted that since 1974, the index has crashed four times: in 1987, 2000, 2007, and 2020.

1987

Between 1984 and 1987, there was a spike of 125 per cent in the S&P 500 index. After this breakneck rally, the index saw a correction of 35 per cent in 1987. It witnessed the fastest fall in 15 days.

2000

Between 1996 and 2000, the S&P 500 jumped 150 per cent and after the stunning rally, the index nosedived 50 per cent from 2000 to 2003.

2007

Again, from 2003 to 2007, the S&P 500 zoomed 101 per cent and following this, there was a sharp correction of 58 per cent between 2007 and 2009.

2020

From 2017 to 2020, the S&P 500 jumped 52 per cent and after this, the index saw a decline of 35 per cent in 2020 within one month.

With inputs from Zee Business Research