The speed of the market’s run-up in the last two months is worrying investors it could overheat soon. The S & P 500 was up more than 16% over April and May, a magnitude that’s only happened in four other instances since World War II, Deutsche Bank Research found. Three of those cases were a massive recovery following a major shock, the Wall Street firm noted. There was the comeback in April-May 2020, directly after the onset of the Covid-19 pandemic; March-April 2009, which followed the Great Financial Crisis; and January-February 1975, following the first oil shock. The speed of those gains could be justified as the clearing of an economic shock causes a rush to buy. However, the last time the S & P 500 rose like it is now outside of a recession period was the few months before the 1987 crash. “The speed of the rally is now bucking all recent precedents for an economy that isn’t emerging from recession,” Henry Allen, macro strategist at Deutsche Bank Research, wrote on Monday. The striking historical precedent does not sit well will some for the current market — especially considering the lingering risks. Much of the current rally has to do with excitement around artificial intelligence, after the latest earnings season proved to many investors that tech stocks, in particular, have further to go even after their massive run-up. Large-cap technology companies are quickly surpassing a bevy of milestones. Micron Technology just recently joined the $1 trillion club, and, according to Nvidia CEO Jensen Huang, Marvell Technology could be the next semiconductor company to join it. But the level of euphoria in the market is worrying investors who think the rally is going too far, too fast. There remain many risks on the horizon that could hurt the stock market, including the likelihood that the Federal Reserve could hike this year. Corporate credit spreads remain tight, even as economic pressures drive the savings rate for consumers to levels only seen briefly in 2022, and before the 2008 financial crisis, Deutsche Bank Research noted. For the time being, oil prices are relatively steady, but any change on that front has the potential to move markets. Already, the Strait of Hormuz has remained closed for longer than investors were expecting. “Whether that can hold if the Strait of Hormuz remains closed is questionable, but for the time being, market expectations of lower oil prices in the future are themselves acting as an important pillar of support,” Deutsche Bank Research’s Allen wrote. Others are getting more worried about the market. Morgan Stanley’s Serena Tang noted that an indicator for market sentiment has turned negative. Barclays’ Stefano Pascale pointed out that positioning is getting stretched. “Risks for a pullback are building,” Pascale wrote. — CNBC’s Deena Zaidi and Nick Wells contributed to this report.
