During premarket trading on Thursday, Apple shares saw modest gains, edging closer to a valuation of $3 trillion.
Some analysts, such as Wedbush’s Dan Ives, anticipate the company could reach a $4 trillion valuation by 2025. The exact implications of such a massive valuation on market weight remain unclear. With Apple holding a 7.6% weighting in the S&P 500, the adage goes, “as goes Apple, so goes the market” (not forgetting Microsoft and its 6.8% share).
According to Irene Tunkel, chief strategist at BCA Research, this momentum has contributed to the overall positive trajectory of the stock market. Other contributing factors include the Federal Reserve’s winding down of rate increases, no recession currently underway, an earnings recession nearing its end, and a substantial amount of idle cash.
Nevertheless, Tunkel warns against premature celebration, pointing to several red flags.
One such concern is the anticipated decline in consumer spending on services, which has been essential in supporting the economy thus far. Additionally, consumers’ excess savings are waning and are projected to decrease even more once student loan repayments resume.
Following the debt ceiling agreement, fiscal stimulus is expected to decrease. Coupled with a cautious banking sector limiting lending, this could expose a weakening job market.
Regarding market valuations, Tunkel notes the current high valuations and incorporation of optimistic projections make the market seem expensive. She challenges the notion that only top-performing stocks are overvalued.
Regarding technical factors, Tunkel observes the market is in overbought territory. The AAII investor sentiment survey shows the highest level of optimism since 2021, and the CBOE VIX is below 14. Tunkel believes these factors may signal a potential mean reversion.
Tunkel ultimately concludes, “While the rally can persist longer, driven by all the positive aspects, eventually a black swan event will emerge, triggering a rapid acceleration of developments – due to the overvalued index, multiples will contract dramatically, leading to a major market downturn.”
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