U.S. stocks keep climbing to uncharted heights, but cracks are beginning to appear beneath the surface. Several major strategists now warn that the optimism driving the market has turned into something far more fragile - a belief that the rally will never end.
The S&P 500 and Nasdaq 100 are both trading near all-time highs, powered by relentless enthusiasm for artificial intelligence and tech megacaps. Yet, behind the scenes, institutions are starting to question whether valuations can justify the pace.
Traders Chase Gains, Risks Rise
Analysts at Citi say that speculative momentum has become concentrated in smaller companies, particularly in the Russell 2000, which recently saw a sharp jump in bullish positioning. This surge in risk appetite, according to strategist Chris Montagu, leaves the broader market vulnerable if the momentum cools.
Meanwhile, Citi’s proprietary Levkovich Index – a gauge of investor sentiment and positioning – now shows markets deep in “euphoria territory,” a zone that historically precedes weaker returns as optimism outpaces fundamentals.
The warning isn’t limited to Citi. Goldman Sachs and Barclays both note that investor confidence is near record levels. At the same time, the rally has become dangerously narrow. A handful of AI-driven giants now dominate the market’s performance, creating what some analysts call a “tech bubble inside the index.”
“The S&P 500 no longer behaves like a diversified portfolio,” said Michaella Gallina, CEO of On Course Consulting. “It’s now a concentrated bet on a few tech titans – and that’s not the kind of structure that holds up when momentum turns.”
Valuations Defy Gravity
According to DataTrek Research, the S&P 500 trades at roughly 25 times expected earnings, a level that assumes corporate profits will jump 13% next year and another 10% in 2027. Such optimism, analysts say, “reflects complete confidence – maybe too much.”
That confidence has also spilled into the options market, where call-option volumes on individual stocks have shattered records. Chris Watling, chief market strategist at Longview Economics, sees the trend as an unmistakable signal of greed.
“What we’re watching is a classic late-cycle move,” Watling said. “When markets run this hard, this fast, it usually ends with a healthy correction. The only question is when.”
Watling doesn’t believe the bull market is over, but he suggests investors may want to take profits before volatility returns. “You don’t need to abandon equities – just sidestep the froth,” he said. “That’s how you preserve gains and buy back at better levels.”
Despite the caution, Wall Street’s mood remains overwhelmingly upbeat. With the Dow Jones near record territory and AI still fueling excitement, investors seem willing to ignore warning signs – for now.
But as history often shows, markets built on confidence tend to stumble when optimism reaches a peak. The euphoria that lifted stocks to these levels could soon become the very reason they fall.
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