Here's Why the Stock Rally is Starting to Crack

It's been a great six months for US stock markets, despite turbulence from tariffs and geopolitical tensions. Economic data continues to surprise to the upside. The Federal Reserve has extended a fresh lifeline to Wall Street. But beneath that surface, there are some signs of a shift in investor sentiment. Our Markets Live Managing Editor Kristine Aquino joins host Stephen Carroll to discuss.

See omnystudio.com/listener for privacy information.

Episode Transcript

Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News.

Speaker 2 (00:08):
I'm Stephen Carol and this is Here's Why, where we
take one new story and explain it in just a
few minutes with our experts here at Bloomberg. All time
highs on the S and P five hundred, the Dow.

Speaker 3 (00:24):
Jones Industrial average up more than seventy points or two
tenths of a percent. That's a record high. The S
and P five hundred up almost thirty points or four
tenths of one percent.

Speaker 2 (00:33):
That's a record high.

Speaker 3 (00:34):
The NASA composite about one hundred and sixty points or
seven tens of one percent, that is also a record high.
Everything is awesome.

Speaker 1 (00:41):
Yeah, it's interesting to see the momentum continuing to the upset.
A lot of reason for us to be very bullish
on US equities in this moment.

Speaker 3 (00:49):
What the concern of the market is be in some
sort of world bubble.

Speaker 2 (00:52):
We understand the excitement about the hyperscalo, but if you
look outside of the hyperscalo, life in industrial America isn't great.
For months, story on stock markets has been one of
record high after record high. The S and P five
hundred had its best September in fifteen years. Surprisingly positive
economic data, lower interest rates, and the rush into artificial

(01:14):
intelligence have all helped repeatedly push indexes to new heights.
But for all the screaming optimism, there are also quieter
concerns that shares may have risen too high, too fast.
Here's why the stock market rally is starting to show cracks.
Our Markets Live Managing editor Christine Aquino joins me. Now

(01:35):
for more, Christine, can you, first of all put this
rally in context for us in terms of what we've
seen up until the end of September. How big has
it been?

Speaker 1 (01:43):
Well, Stephen, I mean it has been a blockbuster year
for US stocks that cannot be denied. As you mentioned,
a record hig after record high, we've seen twenty nine
closing record highs. Actually for this year, the S and
P five hundred is up fourteen percent this year, so
that is set for its third straight annual gain, and
historically speaking, the fourth quarter also bodes well for it.

(02:06):
This index. It has gained in this period for all
but one year in the past decade, and most signs
are pointing to another finish in the green for this
index for the end of this year.

Speaker 2 (02:16):
Now, we've talked before about how the calendar months of
the year can give us trends for markets. But this
has been going on longer than just the good month
of September. What are the key factors that have driven
this rally.

Speaker 1 (02:26):
Well, obviously, big tech is of course still a major
driver of the gains in the S and P five hundred,
given that a lot of those advances that we've seen
this year very much concentrated in the stocks that belong
to the Magnificent seven club. But you know, I was
looking at it, and really what we've seen is a
broadening of this rally, particularly since April. You know, some

(02:48):
measures of market breath has significantly improved since then. And really,
when you look at the year as a whole, all
major sectors in the S and P five hundred are
in the green and so you know, tech of course
contributing the most gains, but everything else is firing on
all cylinders.

Speaker 2 (03:05):
So then what are the signs that investors are starting
to worry about.

Speaker 1 (03:10):
Well, you know, we look at typically positioning in the
options market for this sort of sign of caution among investors,
and there are some you know, if you look at,
for instance, the VIX index, which is what we call
the fear gauge of the S and P five hundred
that is still near the year's lows, but we are
seeing some pockets of caution cropping up, like very recently

(03:32):
we've seen, for instance, a single trade paying about twelve
and a half million dollars to protect against a doubling
in the VIX, which is, you know, it's one of
these outlier scenarios that probably won't unfold when we think
about probabilities, but it's something that people are starting to
think about as a scenario that is worth paying attention

(03:54):
to at the very least.

Speaker 2 (03:56):
So how widely held then could we say these concerns are.

Speaker 1 (03:59):
Yet the bone. It doesn't seem like anyone in particular
is very much in a mood to sell the SAP
five hundred outright, and so it really is just more
about what we're seeing in the options markets and how
people are kind of hedging against that risk even as
they're still buying the index outright. And so these really
are kind of where you look for the initial signs

(04:21):
of that sort of caution. Of course, given the way
that the index, the S and P five hundred has
moved recently, doesn't seem like anyone's happy to sell, but
they're also starting to think about protecting their long positions
currently when it comes to investor positioning.

Speaker 2 (04:39):
Now, we love getting a bit of history from you
as well when we talk to you, Christine, What have
the past rallies and stock markets taught us about how
they end? Typically?

Speaker 1 (04:49):
Yeah, you know, when we look at the boom and
bust cycles in the past ten years in the equity markets, right,
the end rallies have typically been brought on by two
kinds of things. Right, So, one is kind of a
sudden acute shock that tends to catch markets off guard,
either because they were poorly positioned for it or they

(05:12):
didn't quite know how to position for it in the
first place. So I'm talking about, for instance, the Volmageddon
incident in twenty eighteen, where a lot of investors were
kind of caught in in these short volatility structured products
that were pretty complex financial instruments that perhaps maybe investors
were ill prepared to be positioning in. And then, of

(05:34):
course we had the COVID pandemic in twenty twenty, which
was something that kind of seemingly really took markets off guard.
And then of course more recently, we had the US
tariff unveiling in April. Now, this was well flagged, of course,
but I think it was just one of these sort
of events where investors didn't necessarily prepare for beforehand just

(05:55):
because they didn't have the details. They didn't have the
information up until it was unveiled.

Speaker 2 (06:00):
So then, what kind of data point or event should
we be watching out for that could provoke a reversaland
stocks this time around?

Speaker 1 (06:06):
Well, I think what we're seeing at the moment is
a foundation for caution being laid out, primarily because of
a data that we've seen when it comes to a
weaker US labor market. That's something that's kind of been
playing out for months now. FED Chair Jerome Powell has
warned about it in his recent commentary, as have his

(06:27):
colleagues on the Federal Reserve, and that's something that markets
are coming to accept at this point, right, But that's
not necessarily something that could provoke a sudden decline in stocks.
What it is doing is just kind of laying the
groundwork for a bit more caution as what we're seeing now. Now,
what could potentially turn that into a sudden pullback is

(06:49):
something else that introduces that sudden shock that we were
talking about earlier, right, and in this particular moment, the
government shutdown in the US has potential to do that.
If it's something that lasts beyond what investors are anticipating,
that could potentially provide a spark for that sudden downter

(07:10):
because all of a sudden, you have a weaker labor
market narrative combining with a longer than expected shutdown.

Speaker 2 (07:16):
Yeah, the so called black swans on markets things always
to watch out for. Christine, great to talk to you.
Christina Quino are managing editor for Markets Live. For more
explanations like this from our team of three thousand journalists
and analysts around the world, go to Bloomberg dot com
slash explainers. I'm Stephen Caroll. This is here's why. I'll

(07:37):
be back next week with more. Thanks for listening.