Bitcoin has caught the early summer sniffles. Will the stock market catch its cold?
The world’s most valuable cryptocurrency has pulled back about 9% since rallying to above $71,000 earlier this month. Now, it is hovering below $65,000. That could be a bad sign for the broader market, warns Barry Bannister, chief equity strategist with Stifel.
Bannister is concerned that since 2020 “excess liquidity in the wake of the large Covid handouts has caused Bitcoin to correlate with the
” he wrote. That index looks a lot like the
with top holdings including tech giants
Nvidia
,
Apple
,
Alphabet
,
and
Broadcom
.
As such, Bannister suggested in a report Thursday that “the weakening
of Bitcoin signals an imminent S&P 500 summer correction.” He argues that Bitcoin had rallied (and that big tech stocks are still rallying) on hopes of rate cuts by the Federal Reserve over the next few months. But he isn’t convinced that inflation pressures will cool enough to justify easing just yet.
“The correction we expect in risk assets…is furthered by our view that the Fed shifts away from its current cautious dovishness as inflation remains high…thereby exposing the overvalued S&P 500,” he wrote.
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Bannister’s bearishness may be warranted. But he’s part of a relatively small crowd of market cynics on Wall Street. Many other strategists are rushing to raise their price targets for the stock market, reflecting hopes that the Fed may soon begin cutting interest rates and that earnings growth will remain relatively strong. Investors are clearly believers in the argument for an economic soft landing.
Morgan Stanley’s Mike Wilson, a prominent market skeptic, recently threw in the towel on his call for a big drop for stocks. And Julian Emmanuel of Evercore ISI has even suggested the S&P 500 could hit a new high of 6,000 by year-end.
But even Bannister concedes that a 6,000 target for the S&P 500 is possible. He just worries about what will happen after that. Hype about artificial intelligence continues to lift shares of chip giant Nvidia and those of other large-cap techs to dizzying new highs. That may not last, though.
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“We are aware that investors may be in full-fledged bubble/mania mode which looks past our concerns,” Bannister wrote, comparing AI to the internet stock bubble of the late 1990s. He said the current AI rally could push the S&P 500 to 6,000 by the end of the year but that he expects the blue chip index to potentially tumble all the way back t0 4,800 by early 2026 as the hype recedes.
Of course, there are others who share Bannister’s concerns about how the stock market (and U.S. economy for that matter) could be nearing a top. Another investment strategist recently suggested that the relative strength of shares of discount retailer
could be a warning sign for a possible recession, as consumers shift their shopping patterns to hunt for more bargains.
And strategists at Ned Davis Research pointed out in a report earlier this week that “while there’s been no shortage of headlines about the latest record highs on the S&P 500 and Nasdaq, the highs have been less significant as a sign of market strength than as an influence on investor sentiment.” They noted that many other global market indexes and “other broad market barometers reflect trend conditions that are no better than neutral.”
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The Ned Davis strategists are particularly worried about how narrow the current stock market rally is. “There’s currently little to suggest that the breadth of new highs will be confirming the benchmark highs any time soon,” they wrote.
So while the titans of tech may keep propping up equities in the U.S. for a little while longer, investors have to look under the surface and continue to keep an eye on Bitcoin and global stock markets for potential signs of weakness.
Write to Paul R. La Monica at paul.lamonica@barrons.com