The bulls are storming Wall Street.NurPhoto/Getty Images
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Investors are taking more risks as the economy recovers and interest rate cuts are widely expected.
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Skeptics warn that asset valuations are dangerously high and a correction could be imminent.
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It is unclear whether optimism will be rewarded – or FOMO and speculation will be punished.
Risk is back in fashion on Wall Street as investors shed their fears and become more adventurous with their money.
Gone are worries about inflation, which rose to a 40-year high of over 9% less than two years ago, and interest rates, which the Federal Reserve has raised from near zero to over 5%.
Concerns about bank failures, commercial real estate problems and financial strain on consumers and businesses that could trigger a recession have eased.
Fears of two major foreign conflicts, the global economic crisis, a frozen real estate market, political unrest and a bubble in AI stocks have been replaced by excitement over potential profits.
There are still investors who are cautious, but overall market sentiment has turned optimistic in recent months, driven by robust growth and employment as well as the prospect of a Fed rate cut later this year.
Wall Street is betting big on a soft landing in which the Fed manages to reduce inflation without increasing unemployment or causing a recession.
Investors also expect risky assets like stocks to benefit from falling interest rates as yields on safer rivals like Treasury bonds and savings accounts fall.
“The environment for risk-taking is currently favorable,” the BlackRock Investment Institute said in a recent commentary.
The asset manager's research department suggested that the excitement surrounding AI-related stocks like Nvidia, which have driven the market higher this year, could spread to a broader range of names.
“We have been overweight U.S. stocks this year because we believe positive risk sentiment can continue and extend beyond artificial intelligence,” BII said. However, it noted that inflation could rise again later this year.
The story goes on
Similarly, Goldman Sachs analysts said in a recent outlook that “risk appetite will increase this year” as recession relief and interest rate cuts encourage investors.
When the music stops
The outlook for stocks and the economy may seem brighter, but it's worth being at least a little skeptical given the current enthusiasm.
After all, it's in Wall Street's interest to sound positive, because a bullish tone will inevitably attract more client money than urge people to stay away from the markets.
The renewed risk-taking could also represent a new wave of greed and speculation that will end badly.
“Nobody seems to care about valuations, and now Wall Street strategists are claiming that we are in a brand new era,” veteran economist David Rosenberg said in a recent note.
Similarly, bubble expert Jeremy Grantham warned that there has never been a sustained recovery from today's high valuations or full employment in the history of the US stock market.
Grantham stressed that high valuations reduce future returns, meaning the long-term outlook for stocks is “as bad as almost at any other time in history.”
Even market bulls fear that excessive euphoria could pave the way for a painful correction.
“The problem with meltdowns is that they actually have to melt down,” top analyst Ed Yardeni said earlier this year.
FOMO versus risk
A sunnier economic outlook, the promise of interest rate cuts soon and the potential of AI to boost productivity and boost corporate profits are just a few of the reasons investors should feel positive right now.
Still, there is also cause for concern when stocks, Bitcoin, gold and real estate prices are all near record highs, inflation appears to be stuck at nearly double the Fed's target rate, and unemployment rose to a two-year high in February and global growth is rising sharply. Headwinds remain.
Currently, investors seem more worried about missing out on further gains than losing money in a crash, which explains why markets are in a risk-on mood.
“The uptrend is too strong to let go and fear of missing out on the AI rally is the main driver for big-cap stocks right now,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank, in a recent note.
Whether investors will be rewarded for being optimistic about the markets and economy or penalized for giving in to FOMO and mass speculation is far from clear. For now, those who take the risk can enjoy the adrenaline rush.
Read the original article on Business Insider
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