U.S. Stocks' "Irrational Exuberance" Hidden Risks, Strategists Warn of Second-Half Pullbacks

Optimism pervades the market, but upside catalysts are lacking

Recently, despite the fall in U.S. inflation data, the Federal Reserve also released dovish signals, but investment consulting firm Verdence Capital Advisors, chief investment officer Megan Horneman, U.S. stocks continue to rise phenomenon expressed concern that the market is now showing signs of "irrational exuberance Signs of "irrational exuberance", the lack of upward momentum in the short term, the second half of the year or face the risk of retracement.

Fed position change, the market over-interpretation of interest rate cut expectations

Horneman pointed out that the Federal Reserve in June's interest rate resolution, while maintaining interest rates unchanged, but implied that the year may also raise interest rates twice, which is contrary to the market's previous expectations that the Fed is about to turn to the view that interest rate cuts. She believes that the market may have over-interpreted Fed Chairman Jerome Powell's previous dovish comments and had too high expectations for a rate cut.

"The market has digested too many rate cuts," Horneman said, "and the Fed needs to see more evidence of a sustained pullback in inflation before it will actually consider a rate cut."

Downside risks build, the market may see a moderate pullback

Horneman is cautious about the short-term outlook for the U.S. stock market. She believes that the recent market rally stems largely from investors' optimistic expectations of a rate cut, but that such expectations are overly optimistic and lack real support.

"I really don't see any potential upside catalysts," Horneman said, "I see more downside catalysts, such as geopolitical risks in Europe, the U.S. presidential election, and other factors that could hit the market."

Cautious layout, focus on value and small and mid-cap stocks

Based on the cautious judgment of the market, Horneman suggests that instead of blindly chasing up tech stocks, investors should focus on value stocks with reasonable valuations and appropriately increase their cash holdings in case the market pulls back to take in the lows.

Horneman believes that small- and medium-capitalization stocks tend to outperform during the economic recovery phase, while the current market is not paying enough attention to them and the valuation is relatively low, making them more valuable for investment when the market pulls back.

"I think the market may see a moderate pullback in the second half of this year," Horneman said, "and investors should remain cautious, take risk precautions and look for the right time to make a layout."