Market Forecast For the Week of February 20, 2024: Resurrecting The 1990s Bubble

FORECAST: The S&P 500 climbs to new highs at 5055 as Nvidia’s earnings report spurs the bulls to raise valuations to new heights. Consolidation follows as treasury yields continue climbing and the dollar gains against major and minor currencies alike, catalyzing profit taking as earnings season reaches its denouement. What March has in store depends on the digestion of Nvidia’s guidance and detailed financials, as the bulls try making the case that the AI party is just getting started and 2020s should trade just like the innovative and unforgettable 1990s.

The bears have thought it unthinkable that valuations could rise so much that treasury bonds actually paid more than the earnings of large companies. But the equity risk premium has often spent years in negative territory, particularly when interest rates were high relative to declining inflation. The bulls argue that the same scenario is shaping up now, as real interest rates hover near 2% despite inflation clearly on target to fall below 3%. The bulls effectively believe that American multinationals are as safe if not safer than owning government bonds, an argument with saliency among both financial enthusiasts and frustrated observers of the dismal political scene. If the ERP were to hit the baseline of zero, the S&P 500 would be in for another 10% rally on top of its current gains. I see this as unlikely since there is nothing positive in the macroeconomic balance or in geopolitical trends. The bulls have control for the moment but a major correction is coming which retests the lows of just 4 months ago, when the world looked sad but rational.

My current positions include 3M (MMM), Pfizer (PFE), a smaller but still large position in UPRO and a smaller position in SPXU, which nets out to a long position in equities.