The stock market is currently overbought and very expensive in the face of rising interest rates, expensive valuations and fast and furious rally - time to take profits!
The rise from the Iran War low has been a massive 20% and 31% for the S&P 500 and the Nasdaq Composite, respectively. That begs for a pullback.
This is a time to be very cautious and hedge positions and take profits, and only look for compelling bargains.
In the short term, markets fluctuate on narratives. I believe that narratives of high capex, higher interest rates, oversupply, and an overbought market will trend for a bit while taking center stage next week. Markets are always forward-looking. As soon as excitement from the GTC shout-out from Jensen Huang, Nvidia’s CEO for Marvell and other AI stocks started fading the narrative shifted to the all-consuming AI Capex needs. Google’s $85Bn raise indicates that other hyperscalers and AI players could also be coming for more funds. The humongous, spiraling and perhaps half-a-decade-long capital needs have shaken up an already wobbly debt market with high interest rates, with the 30-year at 5% and the 10-year at 4.52%. Friday’s excellent payroll report of 172,000 net new jobs created, which is great for the economy, makes no case for reduced interest rates and adds fuel to the fire. The chances of a rate hike in 2026 have gone up to 38%, and a rate cut to just single digits.
Regardless of where the feds end up, the demand for debt Capex will drive up rates and equity Capex will lead to dilution and oversupply—all of which are negative for the market.
On top of that you have more supply coming from the SpaceX, OpenAI and Anthropic IPOs. We are going to be in turbulent times for a bit, the 4% drop in the Nasdaq Composite could be a precursor of more trouble ahead. A few days ago, I put out a graph of BOFA’s Bull and Bear indicator that indicated completely overbought conditions. I believe the markets will continue to shake out weak buyers until prices get more attractive.
Don’t forget that the S&P 500 and the Nasdaq Comp have appreciated 20.5% and 31.4% in a short span of just 9 weeks! I put out a chart in our webinar stating that this remarkable run has happened only 5 times in over 80 years. Here it is again.
Deutsche Bank’s Henry Allen offered some foreboding commentary.
Despite the catalysts driving today’s advance (e.g., AI excitement, strong data), the speed of the rally is now bucking all recent precedents for an economy that isn’t emerging from recession,” he said, cautioning that “we’re still in an environment of heightened geopolitical risk, and markets are now pricing in a Fed hike as more-likely-than-not for 2026 as well. That latter point—about the prospects for Fed tightening—is particularly concerning, Allen suggested. “Fed hawkishness has been correlated with several multi-asset selloffs of recent years, including 2015-16, late-2018, and 2022,” he said.
So the current pullback of just 3% and 5.5% is not likely to be enough. We should be taking profits and mitigating risk with some hedges.
Around October last year, worries about high levels of debt rose to a crescendo and there was a run on private equity and caps on withdrawals. That lasted for a few months. You can be sure bears will seize every moment to drive AI stocks down, especially the volatile ones. I will not buy anything until I find a very compelling investment case.
We are in good company. BOFA’s Chief Investment Strategist, Savita Subramanian also suggested taking profits. If you remember, she was one of the first to flag strong earnings as a reason to increase her S&P 500, 2026 target to 7,100, which last year looked quite distant. She’s sticking to that target.
This is what she had to say: “Too many red flags. Take profits”
Her basis for the call - she cited that 7 out of 10 bear market signposts had been seen, suggesting that it was time to run for cover. Here are the seven indicators that are flashing warning signals in the table below, and according to her these were in line with previous market peaks. In telling fashion the red flags increased from 4 in March, to 5 in April to the now worrisome 7 in May, suggesting that irrational exuberance and hubris are dominating the market.
Subramanian is not a bear, she was early in calling for a rise in the market citing superior earnings growth and judging from the forecasted 16% growth in S&P 500 earnings in 2027, on top of the 20% growth in 2026, she was right on the ball - and to her credit her target of 7,100 for the S&P 500 for 2026 Ware easily surpassed. Subramanian also rightly asserts confidently that it is odious to compare it to the dotcom bubble, which was woefully short on fundamentals; instead her caution is borne out of deteriorating macroeconomic fundamentals, a lack of consumer confidence, and mostly expensive valuations.
We have started selling expensive data center infrastructure tech stocks, and sending out trade alerts to out premium members.
