Global stock markets are at a frothy high, says Citigroup.
As global stocks push toward all-time highs, a gauge of market risk has reached its frothiest level since the 2000 downturn, but investors should not be backing away quite yet.
That's according to a team of Citigroup strategists led by Beata Manthey, who told clients Friday that their Bear Market Checklist now stands at 10 out of 18 flags globally, and 11.5 out of 18 for U.S. markets. That marks the highest number of flags for that gauge since the global financial crisis, they said.
However, those levels are still less extreme than what was seen in past bear markets - 17.5 out of 18 flags in 2000 and 13 out of 18 flags ahead of that crisis - therefore strategists see no signs of "overexuberance" yet. They're staying optimistic on stocks, while acknowledging risks are rising.
"That said, we recognize that once the count reaches double digits, it has historically tended to rise more rapidly, signaling a potential acceleration in risk. Should more flags continue to turn on, this would increasingly signal that dips should not necessarily be bought," they said.
The S&P 500 SPX is clinging to a string of weekly gains, as some cooling over tech enthusiasm has set in following disappointment around earnings from chipmaker Broadcom $(AVGO)$. The index has logged 24 record closes this year, the most recent coming June 2, according to Dow Jones Market Data.
The Citigroup checklist looks at factors including equity valuation, sentiment, credit spreads, yield curves, fund flows, corporate fundamentals and financing activity. Strategists stress the gauge is not designed to time markets or predict the start or end of stock-market corrections, but rather guide decisions during pullbacks and signal when investors should be more concerned.
With regards to current warning flags, they said valuations across several segments of the market are looking stretched, and investor sentiment is increasingly optimistic. They also noted some heating up of other warnings, such as elevated growth in capital expenditure, notably due to AI hyperscalers, and a pickup in initial public offerings and equity issuance that signal strong demand for risk.
"While the yield curve has also started to flatten YTD [year to date], some other fast-paced indicators like credit spreads still remain tight, sending a more positive signal. This could potentially change should there be more pronounced worries around the private credit space or AI capex-related debt issuance," said the Citi team.
However, none of those signals on their own are giving off signs of a near-term pullback for stocks. "History suggests that major peaks aren't defined by a single trigger, but by a broad set of indicators all moving into more extreme territory at the same time," said the strategists.
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