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NDR sees signals that suggest a secular bull market that’s rolled on since 2009 could be ending.
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The research firm pointed to parallels with past market tops, like high valuations and rising yields.
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A steep decline in stocks would end one of the longest-running secular bull markets in history.
Stocks have rocketed back to record highs, but the market’s next chapter might entail a long period of underperformance, strategists at Ned Davis Research said.
The investment research firm pointed to several red flags suggesting a secular bear market — a prolonged period of negative returns — could be approaching. In a note to clients this week, the firm outlined several parallels it sees to past market peaks that preceded long bear markets, such as the stock bubbles of 1929 and the early 2000s.
If a secular decline were to appear, it would end one of the longest-ever secular bull markets, NDR said. Though US markets slipped into a brief bear market in 2022, stocks have been on a broader uptrend since 2009, the second-longest secular bear market in the last century, the firm said.
“There are a few consistencies to be aware of, along with historical extremes warning that the market is overbought, overowned, and overvalued. That also described market conditions before previous secular tops,” Tim Hayes, the chief global strategist at the firm, wrote.
Here are the warning signs on NDR’s radar:
1. The US is underperforming relative to emerging markets
Returns in the US market are lagging those in emerging markets, a trend consistent with a secular bear market, NDR strategists said.
The iShares MSCI Emerging Markets ETF is up 16% from levels at the start of the year, outstripping the 12% gain in the S&P 500.
2. Tech is starting to lag, while energy is outperforming
The tech sector, meanwhile, has been volatile as investors rotate out of expensive, crowded trades in areas like semiconductors, memory firms, and other AI-linked stocks. The iShares US Technology ETF is down 3% from its recent peak.
However, defensive sectors have been among the market’s best-performing trades, another trend consistent with a secular bear regime. The energy sector of the S&P 500, for instance, is up 7% over the last month, the firm noted, calling it a “bear signal.”
3. Valuations are near “extremes”
Valuations among large-cap companies have steadily grown more extreme. The cyclically-adjusted real earnings yield and the dividend yield for the S&P 500 — two measures that generally decline the more highly the benchmark index is valued — are both approaching the “extremes” that preceded the peak of the dot-com bubble, per NDR’s analysis.