Corporate earnings are surging. Economic data are solid. And oil prices are tumbling in the wake of the interim U.S.-Iran peace agreement. U.S. stocks have the wind at their back and new records within reach.
Yet lurching drops in some recent sessions betray investors' underlying jitters. Many note that big rallies tend to precede a slide. Once stocks have logged huge gains, the question becomes: How much further can they go?
At a time of unusual optimism -- with SpaceX shares soaring into orbit and big tech companies plowing hundreds of billions of dollars into the artificial-intelligence build-out -- here are some of the biggest risks that investors are monitoring:
Stretched valuations
The S&P 500 has already delivered double-digit returns in each of the past three years and is up 9.6% this year, leaving many investors skeptical that the current pace of gains is sustainable.
Optimists note the S&P 500's forward-looking price/earnings ratio has actually declined this year. That is because, as much as prices have climbed, expectations for corporate profits have risen even more.
But stock valuations still look very stretched when measured against the effectively risk-free return that investors can get by holding U.S. Treasurys to maturity.
This can be seen in the narrow gap between the S&P 500's earnings yield -- the inverse of its P/E ratio, expressed as a percentage -- and the yield on 10-year U.S. Treasurys. The so-called excess CAPE yield -- a measure of that gap that accounts for inflation -- is sitting around 1.3%, near its lowest level of the past decade. Unless bond yields fall, many believe that could prove to be a headwind for stocks.
Higher rates
One key reason bond yields climbed this spring was the war-fueled surge in energy prices, which caused investors to increase bets that the Federal Reserve would raise interest rates this year. Now that energy prices are falling again, some expect yields to follow suit.
Yields, though, have retreated only marginally since the interim peace agreement was reached. With inflation comfortably above the Fed's 2% target and moving higher in recent months, many investors are hesitant to get too excited about what a drop in oil prices could mean.
Investors also intensified bets on rate increases after last week's Fed meeting led by new Chairman Kevin Warsh, who expressed more concern about inflation than many had anticipated.
Though appointed by President Trump, who has pressured the Fed to lower rates, Warsh talked repeatedly at a postmeeting press conference about the committee's "unanimous and unambiguous" commitment to price stability.
AI jitters
Even if the Fed does raise rates, some investors believe that it would hardly slow a market propelled by the historic AI build-out.
Spending on data centers and other AI infrastructure this year by just four big tech companies is expected to total more than $670 billion -- a larger investment as a share of the economy than the railroad expansion of the 1850s.
Still, questions linger about the foundations of that investment boom. In recent months, many investors were excited by the news that the AI startup Anthropic was poised to turn a quarterly profit ahead of expectations -- a sign that the financial rewards of running AI models outweighed their hefty costs.
However, that news was followed quickly by a Wall Street Journal report that Anthropic's competitor OpenAI is considering drastic price cuts, ahead of similar reductions that the company expects at Anthropic, as businesses balk at the expense of AI usage.
Whatever the potential cause, many investors see a pullback in AI-infrastructure investment as the biggest threat to stocks, given its importance to both corporate profits and economic growth.
"Once you spend one to two percent of GDP on something like AI, if it ever declines, that's just going to ripple through the economy," said Michael Antonelli, managing director at Baird.
Stock supply
One result of the AI-driven stock rally has been a big uptick in equity issuance, with companies that need cash to fund AI investments taking advantage of the opportunity to sell shares at high prices.
Accounting for both stock sales and retirements, net equity issuance by nonfinancial companies turned positive in the first quarter of this year for the first time since 2021, according to Fed data. That was even before SpaceX raised $86 billion in its initial public offering this month and Alphabet announced plans to raise $85 billion with its own equity offering.
So far, investors have managed to absorb this influx of stock supply. But the trend has still raised concerns, given that net equity supply also turned positive not long before previous stock selloffs in 2000 and 2022.
Surging equity sales could both be a symptom of a rally in its final stages and a cause of its undoing, with the supply of shares eventually testing investors' demand, said Joe Maher, markets economist at Capital Economics.
Positive net equity issuance was likely not a major factor in previous stock bubbles bursting, but "I think you can argue that it was possibly a contributing factor," he said.
