Is the U.S. stock market about to face a Wile E. Coyote-style fall?

Tesla electric cars are stationed in a storage area in the Zeebrugge port, northern Belgium, on June 21. Tesla reported a hefty drop in second-quarter profits due to the effect of price cuts while spending aggressively on artificial intelligence and other technology.Investors are beginning to wonder if they have turned into Wile E. Coyote. Like the cartoon character, they are suspended in mid-air, legs churning frantically. Maybe things will turn out all right.

Nvidia Corp., the most magnificent of them all, now trades for an awe-inspiring 67 times earnings, roughly three times the average price-to-earnings ratio for the market as a whole. Amazon.com Inc.and Tesla also boast nose-bleed valuations. Even the two relative bargains in the Magnificent Seven – Alphabet Inc. and Meta Platforms Inc.Optimists will tell you these lofty valuations aren’t necessarily a problem.

If this market rotation continues, small-cap stocks may finally get their day in the limelight. Still, it’s hard to see how the overall stock market can do well if the Magnificent Seven stocks encounter any bumps at all. In contrast to Capital Economics’ ebullience, Citigroup analysts see U.S. stocks inching up a mere 3 per cent over the coming 12 months.

To be sure, investors can see what they choose in the current crop of numbers. For all the dismal ISM results, the U.S. economy grew at a robust 2.8-per-cent annualized clip in the second quarter, according to data published this week.

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