- Record household equity allocations are a warning sign for the stock market, Ned Davis Research said.
- Optimism indicators, like low mutual fund cash and high CEO confidence, also suggest a potential market peak.
- “With this much optimism, one must ask how much liquidity is left around to buy,” Ned Davis Research said.
American households have been loading up on stocks, but record-high investment levels might not be a good sign for the market.
Analysts at Ned Davis Research highlighted in a Wednesday note that several signals suggest optimism toward the stock market is at or near long-term records typically associated with stock price peaks.
“The top of the market is the point of maximum optimism, as investors get fully invested,” Ned Davis, senior advisor at Ned Davis Research, said.
Signs of peak optimism in the stock market include:
- Households have their highest percentage of financial assets allocated to stocks since the data started being tracked in 1951.
- Cash held by mutual funds declined to a record low in December 2024.
- Institutions have a near-record-long allocation to stocks, only eclipsed by the peak in 2000.
- Foreign investors hold a near-record amount of stocks, only eclipsed by the peak in 1968.
- Confidence among CEOs reached a record when President Trump was inaugurated in January.
Davis added that valuations based on several metrics, such as dividend yields, cash flow, and real GAAP earnings, are at or near extremes.
Taken together, it suggests to Davis that many of the signals typically associated with long-term peaks in the stock market are in place.
“With this much optimism, one must ask how much liquidity is left around to buy,” Davis said.
To be sure, Davis does expect short-term bounces going forward, highlighting that short-term sentiment has been washed out amid this year’s market decline.
“Short term, the market has gotten extremely oversold,” Davis said. This makes the possibility of strong bounces quite likely.”
However, according to the note, the S&P 500’s correction this year is ultimately a “warning crack” of more trouble down the road.
