Market Optimism Reaches Extreme! Wall Street: Next Big Rally Still Missing One Final Piece

The latest U.S. Consumer Price Index (CPI) and Producer Price Index (PPI) came in below market expectations, strengthening market expectations that the Federal Reserve (Fed) will refrain from rate hikes in the near term and may even shift toward a more dovish policy stance, driving investors to continue embracing risk assets. However, multiple Wall Street institutions point out that markets have already highly priced in a 'Goldilocks' scenario, with investor holdings and risk appetite at elevated levels. For U.S. equities to push to new highs, a new catalyst may be required.

Currently, the 10-year U.S. Treasury yield remains around 4.6%, and the U.S. Dollar Index is near its May 2025 peak, placing some pressure on equity market gains. Although the earnings season has started broadly better than expected, market reactions to positive news have become less enthusiastic than before.

Earnings and AI Remain Key—Market Focus Shifts to Outlooks and Positions

Richard Privorotsky, Goldman Sachs partner, stated that the key to whether U.S. stocks can continue rising is no longer headline earnings, but corporate guidance and market positioning. He believes energy prices remain the biggest macroeconomic risk, but inflation trends are steadily improving.

He noted that most bank stocks have already delivered results in line with expectations, and ASML-US’s latest earnings report indicates that global semiconductor capital expenditure demand remains healthy. However, the issue facing AI-related stocks is no longer whether earnings are good, but whether they can exceed already very high market expectations.

The latest Bank of America fund manager survey shows that professional investors’ cash positions have dropped to extremely low levels. The bank’s Bull & Bear Indicator has also flashed a warning signal, indicating that market sentiment has become overly optimistic.

Deutsche Bank points out that both CTA (trend-following) strategies and volatility control funds currently hold equity positions at historical highs. CTA equity holdings are at the 72nd percentile historically, while volatility control funds are as high as the 91st percentile, suggesting limited room for additional buying.

Societe Generale strategists also found that although bond funds and money market funds continue to attract inflows this year, the growth in assets under management (AUM) for equity funds has been more pronounced. Within the EPFR-tracked $72.9 trillion fund universe, equity fund assets have risen to a record high of 64.7%, indicating that global investors are in the most aggressive risk-on state in history.

Fed Dovish Shift Supports Bulls, But Next Rally Needs Fresh Momentum

Despite elevated market positioning, most Wall Street institutions believe the current bullish stance still has fundamental support, including cooling inflation, sustained economic growth, stable corporate earnings, and the possibility that the Fed may signal a more dovish stance in the coming weeks.

JPMorgan’s market intelligence team stated that the latest inflation data has almost eliminated market concerns about a rate hike in July and reduced uncertainty around a September hike—describing the environment as “even better than a Goldilocks scenario” for bulls.

The team continues to favor a “barbell strategy” of overweighting both tech and cyclical stocks, while recommending healthcare stocks for risk diversification. In the tech sector, the previous trading strategy of favoring semiconductors while shorting the “Magnificent Seven” or software stocks may shift, as valuations of some large-cap tech stocks have become attractive again.

However, JPMorgan also warns that if the adoption speed of AI end-use applications does not accelerate further, or if corporate earnings fail to grow faster and reduce reliance on capital markets, the next leg of the U.S. equity rally may lack sufficient momentum.

Goldman Sachs strategist Andrea Ferrario pointed out that there has been a clear rotation in market leadership over the past three weeks, with momentum factors undergoing their most severe correction since the early 2000s. Although oil prices have recently re-emerged as a key cross-asset driver, momentum trading remains the core force driving global equity performance. Without new fundamental catalysts, it may become increasingly difficult for markets to break out to new highs.