Watch the warning signs ahead of the peak of the long-term stock market bull run: NDR

• Ned Davis Research says investors should watch for signs of a potential top in the S&P 500.
• According to NDR’s Tim Hayes, the bull market that began in 2009 is in its mature phase.
• “As the secular bull matures, we watch for signs that it may be at risk,” he said.

Ned Davis Research says investors should pay attention to warning signs of a potential peak as the S&P 500 index enters the 15th year of a secular bull market that began in 2009.

In a note Friday, NDR chief global investment strategist Tim Hayes said the secular bull rally is in its mature phase and investors should pay attention to warning signs such as extreme sentiment.

“What will warn you that it’s over? “The answer comes down to sentiment – ​​so much positive news for so long that it has become the new normal,” Hayes said.

He added: “The risk is that a lack of risk aversion will expose investors to a sustained macroeconomic deterioration that has not been experienced since the bull market began.”

Hayes isn’t calling for an imminent stock market peak, especially since falling interest rates have weighed on stock prices in the past, but he’s aware it could happen.

“The last two secular bull markets lasted 24 years (1942–1966) and 18 years (1982–2000). However, as the secular bull matures, we are seeing signs that it may be at risk,” Hayes said.

The first warning sign of a short-term stock market peak is the growing scope of underlying problems in the U.S. stock market.

In other words, if only a few companies led the stock market higher, it would be a bad sign because it was at a secular high in 2000.

Investors don’t have to worry about this signal flashing just yet, as the latest data shows a sharp increase in market breadth.

Extreme valuations would be another warning sign to watch out for, according to Hayes, who added that high valuations cost money in an ideal macro environment, and if something goes wrong, those valuations could collapse quite quickly.

“Expensive valuations seem justified when earnings are rising, but that also leaves the market vulnerable when earnings are falling,” Hayes said.

Long-term stock market peaks usually occur when earnings growth and economic growth reach extreme levels, because the flip side of this boom is usually a rapid slowdown in growth.

The secular stock market peaks in 1929, 1966 and 2000 coincided with a peak in S&P 500 earnings, “after which prices fell on the growing realization that valuations were not justified,” Hayes said.

While valuations and earnings growth are currently high, they may have more room to grow, according to the note.

“The current level of earnings growth has not yet reached the peak levels of 1929 and 2000, but has already approached 1966 levels.” Hayes said.

He added: “If earnings growth deteriorates, we would expect economic growth to deteriorate.”

Finally, Hayes said investors should pay attention to bond and commodity yields because they will reflect a potential rebound in inflation. However, a rebound in inflation coupled with a rise in interest rates would be an unwelcome warning sign amid the current rally in share prices.

“If this started to change with a severe cyclical bear market, secular bear warnings would be strengthened and we would likely see a reversal of extreme valuations, earnings growth and economic performance,” Hayes concluded.