Fed rate cuts could spark a new stock bubble, SocGen says. Here's the level to watch in the S&P 500.

The market sees about an 85% chance that the Federal Reserve delivers a rate cut in September — but doing so could put the stock market on track to enter bubble territory in the coming months.

That’s according to strategists at Société Générale, who said they saw the possibility that the S&P 500 becomes overheated sometime in the next year.

The level of the S&P 500 they’re warning investors to look out for is 7,500. That implies a 19% gain for the benchmark index, and would signal that the speculative mania has reached bubble proportions.

Here’s what they’re eyeing.

1) Fed rate cuts. Investors are widely expecting the Fed to cut interest rates, with the odds of a September rate cut spiking after the July jobs report was unexpectedly weak last Friday.

According to the CME FedWatch tool, the market-priced probability of a 25-basis-point rate cut next month has jumped to 87%, up from 63% a week ago.

“Gradual rate cutting could add to the positive effect of cyclical data, while aggressive Fed rate cuts to the terminal rate could drive a market valuation bubble,” strategists wrote.

2) Bullish runway. Fed rate cuts are also adding to an already-positive environment for stocks, strategists said, pointing to factors like higher growth, healthy debt-taking in the private sector, and corporate activities improving from lows earlier in the business cycle.

“Strong returns from the S&P 500 over the past three months have borne out our US outlook, crisis of confidence is short-term,” strategists wrote.

The S&P 500 reaching 7,500 next year would imply valuations similar to levels seen during the peak of the dot-com bubble, according to SocGen’s analysis.

The bank’s base case is for the S&P 500 to land around 6,900 by the end of next year, implying a 9% gain from current levels.

Chatter about a potential stock market bubble has been percolating around Wall Street in recent months, given the S&P 500’s record-breaking rally. Stocks have quickly rebounded since bottoming on April 8 following Trump’s tariff announcements, with the S&P 500 up 28% since then.