Is the U.S. bull rally working out of steam?

Over the past five days, the Nasdaq has fallen more than 3%, and while the case for a further decline may look strong at first glance, there are still a few “buts.”

Starting with geopolitics, although tensions in the Middle East have flared up again, pushing oil prices higher and raising concerns about a more aggressive Federal Reserve stance, the White House has little interest in letting the conflict drag on, as it could hurt the Republicans’ chances in the upcoming midterm elections.

According to a POLITICO poll, the share of MAGA supporters who believe the war is worth the economic costs has already fallen from 50% in May to just over one-third, while nearly one in five believe the U.S. should end its involvement in the war regardless of the cost.

Hence, after one “TACO” comes another…

As for market overvaluation, FactSet data shows the S&P 500’s forward 12-month P/E ratio at 20.1, slightly above its 5-year average of 19.9 and 10-year average of 19.0, but still below the 20.4 level reached at the end of the second quarter. Meanwhile, corporate earnings are still growing, especially among large technology companies, with 86% of S&P 500 companies reporting positive EPS surprises and 80% reporting positive revenue surprises so far.

Thus, while the market looks expensive, it may not be a classic bubble, as current valuations are still supported by strong corporate profitability.

How about the decline in semiconductor stocks?

Indeed, concerns are growing that the hundreds of billions of dollars companies like Nvidia are pouring into data centres may not pay off as expected. Reports of a state-backed Chinese company mass-producing DUV lithography equipment, along with profit-taking after a strong rally, are adding pressure to the sector. Still, the fundamentals remain strong, with demand for AI chips staying high and earnings continuing to grow.

So, before going short on the U.S. market, it’s worth remembering that the Strait of Hormuz could reopen soon, while Big Tech, including Microsoft, Meta, Apple, and Amazon, could surprise this week with stronger-than-expected AI investment returns.

Finally, even if the risks play out and things turn worse than expected, remember that markets can stay irrational longer than you can stay solvent.