Wall Street is starting to warn about the stock market

Nobody on Wall Street ever got a fat bonus scaring people out of the market.

That’s logical. Wall Street is largely in the business of helping companies sell securities to the public and coaxing corporations into making deals, both of which generate juicy fees.

Having one of your market analysts screaming that equity market end times are nigh isn’t exactly helpful background music as your bankers try to build a book of orders for that upcoming IPO. In fact, such a stark warning would almost certainly see our analyst counseled on pursuing other careers.

But there’s career risk for analysts in keeping quiet, too. After all, if they do see reasons to be worried about the market but say nothing, and the market does tank, that’s an equally bad look.

So, what’s a career-conscious analyst to do?

It’s obvious. Issue warnings. Raise concerns. Heck, even wave a tiny red flag or two. But just do it very, very quietly.

That way, if something does go wrong, you can always refer clients to back to your comments about the growing pressures on the market, just before the big crack came. On the other hand, if the market keeps climbing, you can shrug off those bearish moments as well-reasoned notes of caution.

Anyway, with the SPDR S&P 500 ETF hovering around new highs, after a more than 25% rally from the worst of April’s tariff-induced drop, you can start to hear these ever-so-faint words of warning from the Street.

“The pockets of exuberance are growing,” Deutsche Bank analysts recently wrote. They hastened to add, “However, other measures of exuberance remain subdued.”

In a note Tuesday, Bank of America analysts couched their concerns like this: “Although we’re not seeing classic signs today of a blow-off top at the broad index level, pockets of the market — e.g., recent IPOs CRWV & CRCL — are exhibiting bubble-like dynamics.”

And on Monday, Morgan Stanley’s chief US equity analyst suggested clients “stay bullish while acknowledging the risks,” and nodded to “some recent froth in lower quality names.”

To be fair, JPMorgan analysts did not equivocate much in a note this week when they wrote that extreme levels of crowding into riskiest, most volatile kinds high-beta stocks “not only presents a risk for this crowded segment, but is also a red flag for the broader market implying there is rising complacency in the short term.”

But clearly, folks who spend their lives keeping an eye on the market are seeing lots of behaviors that look, for lack of a better word, a bit “toppy.”

That is, there’s a lot of highly speculative behavior in the market that can, sometimes, come before a fall. Just look at the resurgence of meme stock mania in shares like Opendoor or, today’s edition, Kohl’s. Or the frenetic trading of crypto and crypto-related stocks. Or the return of SPACs.

And, while nobody cares about valuation anymore, it’s worth noting that the stock market is extremely expensive by conventional metrics like price-to-forward-earnings and price-to-sales ratios.

The S&P 500’s forward P/E multiple is currently 22.4x. It’s only been higher on a sustainable basis during the pandemic-era trading boom and during the tech bubble of the late 1990s. Its price-to-sales ratio of more than 3x is likewise in dot-com bubble territory, with some market leaders, like the market’s best-forming stock, Palantir, sporting valuations that appear objectively insane.

Now time for some mealymouthed hedging of my own. This is not investment advice! Stock markets that are expensive can continue to get more expensive, meaning there’s more upside to be had. And of course it’s always possible that the market is correctly sniffing out the profit potential of the future before analysts can find a way to properly pencil it in to their own quantitative models.

On a personal note, I know from long experience that I have a tendency to see potential disasters everywhere. (I think it’s my Irish side.) Even if they do eventually materialize, it can take a good long while. In other words, I’m a bit risk averse and not much of a speculator.

But the recent whispered warnings from Wall Street suggest I’m not the only one who’s a bit jumpy after the recent rally.