Analysis-US stocks may not be in a bubble, but a pullback could be near

By Lewis Krauskopf

NEW YORK (Reuters) – Some market participants believe the relentless U.S. stock rally is poised for a breather, even if it remains unclear whether equities are in a bubble or a strong bull run.

The benchmark S&P 500 index is up over 25% in the last five months, a phenomenon that has occurred just 10 times since the 1930s, according to BofA Global Research. In an advance led by stunning gains in chipmaker Nvidia, the S&P has already made 16 record highs this year, the most in any first quarter since 1945, CFRA Research data showed.

Bullish investors argue those gains stem from solid fundamentals, rather than the type of rampant speculation that has accompanied past bubbles. Oft-cited reasons include a strong U.S. economy, expectations the Federal Reserve will cut interest rates this year, and excitement over the business potential of artificial intelligence.

Yet some investors believe the market’s nearly uninterrupted ascent means a pullback is due. The last time the S&P 500 slid more than 5% was in October, though BofA data shows such sell-offs historically occur three times per year on average. The index is up 8.5% this year.

“A lot of good news is priced into the market,” said Michael Arone, chief investment strategist at State Street Global Advisors. “From my perspective that just suggests that the risks are skewed to the downside.”

It is not immediately clear what could cause a market sell-off. While stronger-than-expected inflation has dented expectations for how deeply the Fed will cut rates this year, many believe borrowing costs are still heading lower. Elevated consumer prices have also been seen as evidence of economic strength.

Investors have largely dismissed other concerns, from pockets of instability in U.S. regional banks to China’s lackluster economy.

Nevertheless, some indicators are flashing a warning. The S&P 500’s weekly relative strength index (RSI) – which gauges whether stocks are overbought or oversold – has climbed to just over 76, a level it has rarely topped since 2000, Miller Tabak data showed.

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