Is this a continuing bull market or a growing speculative bubble? US investors are in a quandary.

The US Federal Reserve's (Fed) decision to cut interest rates by 25 basis points and statements by its chairman, Jerome Powell, have reignited the debate in the markets. Powell signaled that the current greater threat is an economic slowdown, not a potential return to high inflation. This declaration has provided fuel for analysts and investors, whose opinions on the future of the stock market remain sharply divided.

Steve Eisman, who gained fame by correctly predicting and betting on the collapse of the US housing market before the 2008 crisis, is now optimistic about the prospects for the stock market.

“Ultimately, I think the Fed will cut interest rates by a total of up to 100 basis points and that will be it,” he said in an interview with CNBC.

In his opinion, the central bank's latest decision isn't crucial for investors. While lower interest rates may provide a slight boost to the real estate market, they won't pull it out of its current stagnation.

According to Eisman, the most important investment topic right now is artificial intelligence (AI). It's not only responsible for the impressive growth in stock markets, but is becoming one of the main engines of the entire economy. "That's the most important thing I'm focusing on right now," he emphasized. He added that AI infrastructure is a key element of this revolution, and the energy sources necessary to power massive data centers are becoming a particularly interesting topic.

"If someone had said ten years ago that we would be talking about nuclear energy in this context, it would have caused a huge surprise. The energy aspect of this story is fascinating," the investor said.

Ray Dalio, founder of the hedge fund Bridgewater Associates, speaking at an economic forum in Singapore, warned that the growing US national debt poses a serious threat to the entire global monetary system.

"We see a threat to the monetary system," Dalio said. "The sum of various factors will determine whether we will witness the end of the American empire."

The founder of Bridgewater Associates pointed out that the US government's spending exceeds its revenue by 30%, requiring the issuance of $12 trillion in debt to cover the difference. "The global market doesn't have sufficient appetite for this debt, which creates a fundamental supply-demand imbalance," he explained, attributing the country's uncontrolled debt to "human nature."

David Rosenberg, founder of Rosenberg Research, who also gained notoriety for predicting the 2008 financial crisis, is sounding the alarm. While his subsequent predictions haven't always panned out, as estimates for the S&P 500 continue to rise, it's worth heeding his arguments as a market bear.

Rosenberg warns that the main US stock index could decline in the coming years. He bases his thesis on historical company valuations. He cites the cyclically adjusted price-to-earnings ratio (also known as Shiller CAPE) for the S&P 500, which averages earnings over the past 10 years.

Currently, the index hovers around 37.5, the third-highest reading on record, lower only than the readings in 2021 and 2022. Rosenberg's calculations indicate that when the market reached such high valuations (above 35 on the Shiller index), the index's return was negative in the following year.

Moreover, this is happening at a time when the American economy is sending signals of weakness, as evidenced by labor market data, among other things. "This is what euphoria looks like; we're seeing it in real time. We're in a massive price bubble, and it's still growing. We know we're dealing with a bubble when prices rise despite negative fundamentals," he told Business Insider.

Larry Summers, former US Treasury Secretary, argues that the US central bank's monetary policy is actually looser than commonly believed. Therefore, he believes the biggest risk does not lie with a weakening labor market, as the Fed chairman suggested.

"In my opinion, given overall financial conditions, policy is a bit more accommodative than people think," Summers said on Bloomberg Television. "The balance of risk is tilted more towards inflation than unemployment," Summers said.

He emphasized, however, that his disagreement with the Fed chairman was "a matter of degree." "The biggest risk in this situation is that we lose sight of our 2% inflation target and become a country dominated by inflation psychology," he warned.

Lars Naeckter, a futures strategist at Bank of America (BofA), recommended investors return to the Chinese stock market in early September 2024. The recommendation proved accurate – the CSI 300 index soared at the end of the month and gained 30% by October 8, reaching a two-year high.

Now, his recommendation has changed. After the index's 12% gain since early August, room for further appreciation may be limited. Recent optimism has pushed the Chinese stock market into overbought territory.

"We can expect more 'normal' and steady growth, instead of the crazy 25-30% surges," says the strategist. "Many investors have already invested in the Chinese bull market, so further positive impulses likely won't trigger such major changes in their portfolio allocations," he adds.

The latest BofA survey of fund managers found that 28% of them maintain an overweight position (allocation above the benchmark) in their portfolios. This is the highest percentage in seven months. Furthermore, only 16% of investors expect the economy to weaken.

Michael Hartnett, chief investment strategist at BofA, concludes that stock indices, which have been hitting new record highs recently, won't reverse course for some time. The market is in a bull run now that fears of a "recessionary tariff war" have subsided and equity allocations haven't yet reached "extreme levels."

The biggest risk was considered by 28% of respondents to be a second wave of inflation, and 24% to be the weakening independence of the Fed.

The survey was conducted between September 5 and 11 on a group of 165 fund managers who control assets worth a total of $426 billion.

Source: Verslo žinios

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