This blistering stock market rally just won’t quit, and investors hate it. Portfolios are soaring, but nerves are jangling. Every fresh high seems to make people more uneasy, not less.
Chris Beauchamp, chief market analyst at IG, says the pattern has been set. “This continues to be one of the most disliked rallies in history. Each new high in indices and every milestone achieved by individual stocks is presented as evidence of a bubble in equities.”
The disbelief is widespread, the anxiety understandable. Yet that won’t stop the bull run. “Despite signs of nervousness around tech earnings, the market continues to demonstrate remarkable resilience,” Mr Beauchamp adds.
Every bull market climbs a wall of worry, the old saying goes. Maybe we’ve just forgotten that. But the wall looks particularly steep today. Investors are torn between chasing shares higher or pulling money out before the crash. There’s no easy answer.
Inevitably, US tech is still at the heart of it. It has powered the last 15 years of gains and remains the engine today, supercharged by artificial intelligence.
When ChatGPT burst on to the scene in 2022, the world saw what the fuss was about. Shares in chipmaker Nvidia have since risen twelvefold.
The sums involved are staggering. Projections suggest the so-called AI hyperscalers such as Meta Platforms, Microsoft, Amazon, Alphabet and Oracle will invest a total of $400 billion in AI infrastructure such as buying chips and building data centres this year alone.
The stakes are enormous, and the outcome impossible to call. No wonder investors are uneasy.
Comparisons with the late-1990s dot-com boom have gone viral, as valuations fly. Nvidia has become the world’s first $5 trillion company, while Microsoft and Apple have joined the $4 trillion club.
Microsoft’s deal with OpenAI, which will see the ChatGPT maker purchase $250 billion of Azure cloud services, landed at the right time, Mr Beauchamp says.
He says it shows the technology is “finally entering the deployment phase rather than pure hype” but warns: “Regulatory scrutiny is inevitable given Microsoft’s dominance, and the valuation assumes OpenAI keeps growing at breakneck speed. Any slowdown and this looks expensive.”
The third-quarter earnings season brought fresh drama. Google owner Alphabet silenced doubters with its first $100 billion quarter, says Matt Britzman, senior equity analyst at Hargreaves Lansdown.
“AI Overviews and AI Mode are clearly resonating with users, easing fears that Google’s core search business is under threat from generative AI,” he adds.
But Meta Platforms rattled investors despite strong engagement. “Markets focused on two negatives: lower growth for the next quarter and a sharp increase in spending plans,” Mr Britzman says.
Microsoft delivered another strong quarter, but Azure's growth missed sky-high expectations. “Even so, demand for AI services is so strong that Microsoft can’t build capacity fast enough,” Mr Britzman adds.
Apple hit record earnings due to iPhone demand, while Amazon’s cloud division smashed forecasts. Only Nvidia’s results remain, due on November 19.
“The Magnificent Seven [of Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla] haven’t delivered resounding beats,” says Kyle Rodda, senior financial market analyst at Capital.com. “But with only Nvidia left to report, it’s likely the cohort will exceed the 15 per cent earnings growth predicted before the beginning of earnings season.”
So far, the market likes what it sees. But it’s not all about Big Tech.
Another force behind the rally is the US Federal Reserve. Investors have been betting on rate cuts and got another last week, the second in two months, reducing the funds rate to between 3.75 per cent and 4 per cent.
Markets expected it, but Fed Chair Jerome Powell’s subsequent comments unsettled traders, says John Wyn-Evans, head of market analysis at financial advisory Rathbones.
“He stated that a cut in December was ‘far from a foregone conclusion’, knocking a quick half per cent off equities.”
The odds of another cut in December have since dropped from around 92 per cent to 75 per cent, but George Lagarias, chief economist at Forvis Mazars – an audit, accounting and consulting business – says Mr Powell was right to “pour cold water on expectations for a series of rate cuts”.
Mr Lagarias added that an independent central bank "would have more credibility if it needed to intervene in case the AI-driven market retrenches".
David Kohl, chief economist at Swiss private bank Julius Baer, is optimistic. “We continue to expect further rate cuts by 25 basis points at the forthcoming Federal Open Market Committee meetings in December, January and March.”
If he’s right, the rally still has fuel in the tank, helped by the Fed’s decision to end quantitative tightening on December 1.
Maya Bhandari, chief investment officer for multi-asset, Europe, Middle East and Africa at investment manager Neuberger, suggests investors should relax and enjoy it.
“We are encouraged by the continued strength of corporate earnings and balance sheets,” Ms Bhandari says.
Corporate debt sustainability has “improved meaningfully” over the last five years, she adds. “Companies have used the combination of low interest rates and surging post-pandemic profits to tidy up their balance sheets across almost every conceivable metric.”
Even concerns over the $4.5 trillion US shadow banking sector seem overdone. “We detect few if any signs of broader credit or systemic stress.”
Ms Bhandari remains positive over the next six to 18 months as borrowing costs ease, with Neuberger’s portfolios tilting towards riskier assets such as equities, particularly US small caps, Japan and China.
The US isn’t the only market in full flow, says Robert Fullerton, senior research analyst at Hawksmoor Investment Management.
“One winner may surprise many investors. Year-to-date, the UK equity market is the third best-performing major market. I have China up 34 per cent, Europe up 27 per cent and the UK next with 17 per cent.”
He adds: “This is ahead of Japan with its corporate reform story, ahead of the US with its exceptionalism and the Magnificent Seven still dominating headlines, and ahead of India with its multi-decade structural growth story.”
No bull run lasts forever, so how long can this one last? Shares did wobble towards the end of last week after a couple of earnings disappointed and fresh doubts about that December rate cut. But with the Fed standing ready to ease rates again if conditions worsen, investors can take comfort from having a safety net.
Bull markets have a habit of running longer than anyone expects, and those who’ve bet against this one have lost out so far. The S&P 500 is up around 16 per cent this year. With the traditionally volatile months of September and October now out of the way, an end-of-year rally could yet push it beyond 20 per cent for the third straight year, an extraordinary feat.
We’re not there yet, but with more rate cuts in the pipeline, it would take a brave investor to sell now. Given time, investors may even learn to love this rally. Which, of course, is when it will probably all go wrong.
