Some Wall Street banks are sounding caution on the U.S. stock rally, warning that stretched valuations have made equities more vulnerable to declines.
Similar valuation levels have preceded periods of rocky performance. Historically, the S&P 500 has experienced a median drawdown of 14% over the next 12 months when valuations stand at current levels or above, compared with a 5% drawdown over a typical 12-month period, Goldman Sachs said. WFII recently downgraded the technology sector, which has led this year’s S&P 500 rally, to “neutral” from “favorable,” citing “unattractive” valuations.
The earnings outlook for the high-growth companies that make up the Nasdaq 100 is more tepid than in 2021, when the index also rallied sharply, making it more challenging to justify high valuations, said Michael Purves, chief executive officer at Tallbacken Capital Advisors. Investors next week will be watching for more data on the economy’s health, including key inflation data on Friday, as the second quarter comes to an end.