S&P 500 Continues to Rally, Up 40% Since April Lows

The S&P 500 has experienced a significant rally, surging nearly 40% since its April lows and reaching all-time highs, prompting both optimism and caution among market participants. This upward momentum has been largely driven by mega-cap technology companies investing heavily in artificial intelligence (AI). However, several financial experts and institutions have raised concerns about the sustainability of this rally, pointing to potential risks and signs of market overheating.

Leon Cooperman, chair and CEO of Omega Family Office, has expressed apprehension that the current market resembles the late stages of a bull market, where bubbles can form, and risks escalate. Referencing a 1999 quote from Warren Buffett, Cooperman highlights that bull markets often end when markets are driven by momentum rather than fundamentals. He emphasized that the current market sentiment mirrors this scenario, with AI company valuations reaching “ridiculously high” levels.

Goldman Sachs strategists, led by David Kostin, have cautioned that the recent S&P 500 rally may face near-term challenges due to economic growth concerns. They noted a 5% selloff driven by unwinding elevated positions and highlighted that cyclical stocks have underperformed defensive stocks by 9%.

The strategists stressed that an improved U.S. economic growth outlook is necessary to reverse recent market rotations. Consequently, Goldman Sachs revised its 2025 earnings per share growth forecast from 11% to 9%, maintaining a year-end S&P 500 target of 6,500, approximately a 9% increase from current levels.

Adding to the cautious sentiment, JPMorgan strategists have voiced concerns that the prevailing “goldilocks” narrative—characterized by moderate growth and inflation—could shift towards a 1970s-style stagflation scenario. They cited factors such as lenient financial conditions, tight labor markets, high government spending, and geopolitical tensions that could lead to higher inflation. This shift may compel the Federal Reserve to maintain elevated interest rates for an extended period, posing risks to the equity market.

BMO Capital Markets raised its year-end 2025 target for the S&P 500 to 7,000, up from the previous estimate of 6,700. This optimism is based on factors including Federal Reserve rate cuts, solid corporate earnings, and the belief that AI is not in a speculative bubble. BMO's Chief Investment Strategist, Brian Belski, suggested that 2025 could mirror the mid-1990s “Goldilocks” period of balanced economic growth and inflation.

Despite the rally, Wall Street is concluding one of its calmest quarters since 2019, with the S&P 500's one-month volatility at a six-year low of 10.8. This unusually low market turbulence has raised concerns about a potential spike in volatility, as historically, such calm phases are often followed by sudden market swings. Markets are wary that even minor shocks could trigger significant market corrections, especially given the increased equity exposure by rules-based investment strategies holding substantial assets.