The Most Hated Bull Market in History: Unraveling the Current Stock Rally.

Introduction:

The current stock market rally, which began in mid-October, has sparked mixed sentiments among investors. Despite facing challenges such as high inflation, interest rates, and recession fears, the rally has surged forward, leading market veteran Ed Yardeni to suggest that it may become the most hated bull market in history. In this article, we delve into Yardeni's four key reasons why investors are skeptical of this rally, highlighting the factors that have shaped this unique market environment.

1. Challenging Valuations:

Yardeni emphasizes that the current bull market started with historically high price-to-earnings (P/E) ratios. The S&P 500's forward P/E ratio of about 18x in the fourth quarter of 2022 was above its 25-year average of 16.8x. Typically, attractive buying opportunities emerge at the end of bear markets when valuations are low. However, in this instance, valuations did not reach attractive levels during the recent bear market, leaving investors cautious and potentially missing out on buying opportunities.

2. The Persistence of a Potential Recession:

Despite widespread fears of an imminent recession, the stock market has continued to rise. Yardeni describes this as the bull market having the audacity to charge ahead while almost everyone agrees that a recession is looming. The absence of stock price declines in the face of recession warnings from CEOs and business leaders has added to the disbelief surrounding the current rally.

3. Overcoming Banking Crises:

The current stock market rally remained resilient even during a regional banking crisis that led to the failure of major banks. Notably, Silicon Valley Bank, Signature Bank, and First Republic Bank all experienced significant collapses. Despite the magnitude of these bank failures, stocks continued to climb. This development, similar to the 2008 financial crisis, confounded market participants and raised concerns about the sustainability of the rally.

4. Limited Participation of Smaller Stocks:

One aspect causing skepticism is the lack of broad participation in the rally among smaller companies within the S&P 500. The market surge has been predominantly driven by mega-cap tech stocks, which has led to a decline in the ratio of equal-weighted to market-cap-weighted S&P 500. Such limited breadth among smaller stocks contrasts with the typical characteristics of young bull markets, further fueling skepticism.

Contrasting Perspectives:

Despite the prevailing doubts, Yardeni acknowledges that several stocks beyond mega-cap tech have reached record highs recently. He points to strong breadth in positive earnings forecast revisions and believes in the current bull market. Moreover, he highlights the potential for a technological revolution driven by artificial intelligence, robotics, and automation, leading to a significant increase in brain productivity. This perspective suggests that all companies are becoming technology companies, which could drive a boom akin to the Roaring 1920s.

Conclusion:

The current stock market rally has become a subject of intense debate and skepticism among investors. Ed Yardeni presents compelling reasons for why this bull market might become the most hated in history, ranging from challenging valuations and recession fears to the limited participation of smaller stocks. However, there are counterarguments suggesting the presence of record highs in various sectors and the potential for a technology-driven productivity boom. As the market continues to evolve, only time will reveal the true nature and longevity of this intriguing bull market.