Stocks keep breaking records with the Dow Jones Industrial Average surging by 1,000 points in the past 53 trading days to cross the 23,000 mark for the first time.
President Donald Trump has taken credit for record-high stock prices with his pledge to cut taxes and make business-friendly reforms.
But the market is showing signs of being in a late-stage crackup boom, an analyst said.
"This is kind of how bull markets end," Savita Subramanian, equity and quant strategist at Bank of America Merrill Lynch, said on the CNBC business news channel. "What we're in right now is this sort of euphoria around stocks that's been missing for this entire bull market."
Since bottoming in March 2009 amid the worst global recession in 80 years, the S&P 500 has nearly quadrupled in value even as some observers called it the “most hated bull market in history” – mostly because investors avoided stocks after getting burned by the collapse of asset bubbles.
Bears have thrown in the towel. Cash balances for fund managers have fallen to 4.7 percent, the lowest in two and a half years, and investors have put $236.7 billion into stock-based funds, according to data from BofAML and EPFR cited by CNBC. Last week's fund inflows of $11.6 billion were the most in 17 weeks with $2 billion going into actively managed mutual funds.
Investors are showing signs of euphoria, with CNN's Fear & Greed Index hovering in the "extreme greed" range for weeks. The indicator may show that investors are fully invested in stocks, even as companies buy back stock and central banks keep providing liquidity to the financial system. Meanwhile, volatility indexes that measure investor sentiment as reflected in options prices are below average levels.
But stocks that beat Wall Street’s earnings estimates aren’t rising as much as they have earlier in the bull market – a sign that the market is getting tired. BofAML has a year-end target of 2,450 for the S&P 500, a 4 percent decline from the current level.
"There has been no reward for earnings beats, which is a little bit weird," Subramanian said. "The bar's getting higher. Investors are expecting good news. When they got good news, it's already in the stocks."
The Federal Reserve suggested in a report that the U.S. central bank, which has kept rates near record lows since the 2008 financial crisis, deserves most of the credit for the stock rally.
Fed economist Anthony Diercks and William Waller of Carnegie Mellon University found that from 1980 to 2008, increases in discount rates associated with news about tax cuts swamped the positive effects of cash flow that tax cuts would have on stock prices.
Higher interest rates would have slowed economic activity, reducing the positive cash flow generated by the tax cuts in the first place.
"The recent experience could be due to a few issues: (1) there are additional factors at play such as changes in regulation, government spending, and repatriation that may be important, (2) because of the proximity to the zero lower bound monetary policy may not be acting as aggressively as it did in previous post-1980 tightening cycles, and (3) investors are unusually optimistic," Diercks and Waller wrote.
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