US500: Disconnection between equity prices & broad economic data

The US500 is trading near record highs with the index up nearly 18% over the year. The market is driven by optimism about an imminent Fed rate cut, robust Q3 earnings, and continued strength in large cap tech shares, but fundamental valuation concerns and signs of overbought technical conditions persist.

Fundamental Analysis

• The rally is resting on expectations that the Federal Reserve will announce its first 2025 rate cut this week, likely by 25 basis points.
  
• Mega cap tech and rate sensitive sectors are leading gains, but economic headwinds remain, unemployment is ticking higher, and indicators like retail sales and leading economic indicators have weakened.
  
• Valuations among the top US500 stocks are stretched, with the top 10 names trading at a forward P/E of 30x well above historical averages and record levels of cash hoarding notably by Berkshire Hathaway are raising caution flags.
  
• Disconnection between equity prices and broad economic data is notable, with softening consumer metrics and elevated corporate bankruptcies.
  

Technical Analysis

• Technical signals remain mostly bullish, as the index continues to trade within a strong uptrend and posts new highs.
  
• Short-term technical indicators such RSI show overbought conditions and weak breadth could signal fatigue.
  
• Key support is found at 6,545, then at 6,505 while immediate resistance is at the all-time high and then at projected levels of 6,630 ahead of 6,690.
  

Analysis by Terence Hove, Senior Financial Markets Strategist at Exness