Bitcoin has caught a summer cold. Will the stock market catch a cold too?
The world's most valuable cryptocurrency has fallen about 9% since surpassing $71,000 earlier this month and is now below $65,000, which could be a bad sign for the broader market, warns Barry Bannister, chief equity strategist at Stifel.
Bannister is concerned that since 2020, “excess liquidity from large-scale COVID-19 relief payments has led to Bitcoin becoming correlated with the Nasdaq 100.” The Nasdaq 100 index is very similar to the S&P 500, and its top stocks include technology giants Nvidia, Microsoft, Apple, Amazon.com, Alphabet, Meta Platforms, and Broadcom.
That's why Bannister wrote in his report Thursday:
“Bitcoin's surge signals a summer correction in the S&P 500 is imminent,” he argues. Bitcoin has risen on hopes of interest rate cuts from the Federal Reserve in the coming months (and big tech stocks are still rising), but he's not yet convinced inflationary pressures will subside enough to justify easing.
“The expected correction in risk assets would be further fueled by our view that the Fed will shift from its current cautious dovish stance amid persistently elevated inflation, exposing an overvalued S&P 500,” he wrote.
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Mr. Bannister's bearish view may be justified. But he's part of a relatively small group of market skeptics on Wall Street. Many other strategists have been rushing to raise their stock-market targets to reflect expectations that the Fed will soon start cutting interest rates and that profit growth will remain relatively strong. Investors are clearly buying into the soft-landing thesis for the economy.
Well-known market skeptic Mike Wilson of Morgan Stanley recently abandoned predictions of a big drop in stock prices, and Julian Emanuel of Evercore ISI has even suggested the S&P 500 could hit a record high of 6,000 by the end of the year.
But even Bannister acknowledges that a 6,000 S&P 500 price target is possible. He's just worried about what comes after. Rising hopes for artificial intelligence have sent shares of semiconductor giant Nvidia and other big tech companies to dizzying new highs. But that may not last.
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“We know investors could be in full-blown bubble/mania mode and overstep our concerns,” Bannister said, comparing AI to the internet stock bubble of the late 1990s. He predicts that the current AI rally could send the S&P 500 soaring to 6,000 by the end of the year, but that the blue-chip index could fall to 4,800 by early 2026 as the mania subsides.
Of course, others share Bannister's concern that the stock market (and the U.S. economy) may be nearing a peak. Another investment strategist recently suggested that the relative strength of discount retailer Walmart Inc.'s shares could be a warning sign of a possible recession as consumers change their shopping patterns to look for better deals.
And while there has been “no shortage of headlines about the S&P 500 and Nasdaq's recent record highs, the highs are more significant as an impact on investor sentiment than as a sign of market strength,” strategists at Ned Davis Research wrote in a report earlier this week. They noted that many other global market indexes and “other broad market barometers are reflecting trend conditions that are below neutral.”
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Ned Davis strategists are particularly concerned about the narrowness of the stock market's current rally: “There is little at present to suggest that the range for new highs will confirm benchmark highs anytime soon,” they wrote.
So while tech giants may continue to prop up the U.S. stock market for a little while longer, investors should keep a close eye on what's below the surface and continue to monitor Bitcoin and global stock markets for signs of potential weakness.
Write to Paul R. La Monica at paul.lamonica@barrons.com
