Investors bet on the rise of U.S. stocks! Analysts warn: the market is "dangerously bullish"

Since the U.S. presidential election, the market has experienced a strong rebound, with significant increases in the stocks of technology and manufacturing giants as well as cryptocurrency prices. Many investors believe there is further room for the market to rise. According to EPFR data, as of last Wednesday, U.S. stock ETFs and mutual funds attracted nearly $56 billion in inflows, the second-largest weekly inflow recorded since 2008. Such funds have seen inflows for seven consecutive months, the longest streak since 2021, when a sharp market rise pushed stock prices to multiple historical highs. What is driving the optimism? Many investors indicate that they expect tax cuts and reduced regulations during Trump's second term. Dominic Rizzo, a technology portfolio manager at T. Rowe Price, stated that tariffs could boost U.S. manufacturing, leading to a surge in domestic spending and investment. According to a survey by the American Association of Individual Investors, the proportion of bullish investors jumped to 49.8% last week, while the proportion of neutral investors fell to its lowest level since 2022. About 40% of respondents said the U.S. election made them more optimistic about the market. Rizzo said, “Animal spirits are very much alive now.” Many investors are flocking to market sectors particularly sensitive to the economy, such as small-cap stocks. Since the election, the Russell 2000 Index has risen nearly 2%, and one of the largest ETFs linked to that index attracted $3.9 billion in a single trading day this month, the highest level since June 2007. Meanwhile, fund managers have increased their long positions, pushing net long positions in the futures market to their highest level in over four years. Some say that after the recent rise, stocks appear to be expensive. The current price-to-earnings ratio of the S&P 500 Index is 22 times expected earnings for the next 12 months, up from an average of about 20 times over the past five years. Bank of America strategist Savita Subramanian noted in a report to clients last Friday that market sentiment is “dangerously bullish.” Bond investors are sending different signals, pushing the benchmark 10-year U.S. Treasury yield to 4.426% last Friday as they bet on larger deficits and higher inflation in the coming years. One closely watched indicator—the equity risk premium (the difference between the earnings yield of the S&P 500 Index and the 10-year U.S. Treasury yield)—is close to zero, marking the lowest level since 2002, according to Dow Jones Market Data. This means that the returns from holding stocks relative to bonds are decreasing. Rob Arnott, founder and chairman of Research Affiliates, said, “The market is very expensive and unlikely to continue rising significantly.”