Stock Market Indicator Signals ‘Excessive’ Confidence
Recent market analysis shows investor confidence in U.S. equities riding at unusually high levels, hinting at a potential near-term pullback that could put an end to the S&P 500’s extended bull run.
In a note cited by MarketWatch, DataTrek Research founder Nicholas Colas tracked the 30-day price correlations of five main S&P 500 sectors—technology, industrial, consumer discretionary, financials, and health care—against the wider index. Colas found that correlations hit “abnormally low” levels last week, indicating that each sector is moving independently from the overall market and signaling “excessive investor confidence.”
Why It Matters
The S&P 500 has been on a sustained rally since late 2022, barring occasional dips and a steep decline earlier this year, and has surged around 35 percent since its April lows. This has largely been fueled by investment in America’s tech giants and exuberance surrounding the growth potential that advancements in AI may unlock.
However, amid soaring market caps and multiples—valuations compared to objective measures of financial performance—some analysts have warned that this AI enthusiasm may be driving prices beyond what their fundamentals justify, and raising the risk of a major correction reminiscent of the dot-com bubble bursting in 2001.
What To Know
Colas noted that such low correlations often precede major declines for the S&P 500, suggesting the market is close to peaking and that an “imminent pullback” within the next few weeks is possible. However, he said the index may have further to climb before topping out.
Despite what he observes as “excessive” levels of confidence, he noted that “history shows we still need a catalyst to come along and reset them back to more rational levels.” He added that, until one emerges, stocks may continue “slowly drifting their way higher.”
“This is not a ‘sell everything today’ signal,” Colas wrote. “While we believe our correlation work does a good job of signaling near-term highs, we know reliably calling tops is ferociously difficult.”
Similar to Colas’ correlation analysis, some experts have highlighted the rapid rise in U.S. stock market values relative to the overall size of the American economy as another concerning development. Dubbed the “Buffett Indicator” after legendary investor Warren Buffett, this ratio has reached near-record highs, signaling widespread overvaluations and the possibility of a near-term correction.
What People Are Saying
DataTrek co-founder Nicholas Colas, in a note cited by MarketWatch, wrote: “S&P sector correlations currently reflect excessive investor confidence, but history shows we still need a catalyst to come along and reset them back to more rational levels.”
“This is NOT a ‘sell everything today’ signal,” he added. “While we believe our correlation work does a good job of signaling near term highs, we know reliably calling tops is ferociously difficult.”
David Rosenberg, founder of the economic and market insights firm Rosenberg Research, told Newsweek last week: “I don’t see a crash, but I do believe the market is way overpriced and too much AI-driven growth is being discounted. I am expecting negative surprises on this front to minimally generate the conditions for a steep market correction.”
Oxford Economics Lead Economist Adam Slater, in a note shared with Newsweek on Monday, said: “The tech sector has been the key driver of recent U.S. growth, with surging stock prices and heavy investment in equipment and software. But this leaves the U.S. vulnerable if tech suffers a downturn—without tech investment, U.S. GDP would have barely grown in H1 2025, and business investment would have actually declined.”
“We think the risk of a downturn in the tech sector is lower than at the height of the 2000 dot-com bubble, but it’s far from negligible,” he added. “A particular concern is that the predictions of very large and sustained productivity gains from AI may not materialize.”
Goldman Sachs CEO David Solomon told Bloomberg TV on Friday: “I sleep very well, and I’m not going to bed every night worried about what will happen next. But markets run in cycles, and whenever we’ve historically had a significant acceleration in a new technology that creates a lot of capital formation—and therefore lots of interesting new companies around it—you generally see the market run ahead of the potential.”
“I wouldn’t be surprised if in the next 12 to 24 months we see a drawdown with respect to equity markets,” he added. “But that shouldn’t be surprising given the run we’ve had.”
What Happens Next?
Analysts and investors remain divided on how long the stock market’s bull run will continue, how severe any subsequent pullback might be and what could trigger this shift. Rosenberg said potential catalysts include “a renewed inflation scare,” “heightened tariff uncertainty,” or the existing weaknesses in the labor market “morphing into an outright recession.”