AI bubble or interest rates—which will become the "culprit" ending this round of the US stock market bull run?

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U.S. stock valuations have entered an extremely high zone, but analysts believe that high valuations alone are not enough to end this bull market—the true "culprit" would require a sharp jump in interest rates or a fundamental collapse of AI profit logic, neither of which have occurred at present.

On Wednesday, Ian Harnett, co-founder and Chief Investment Strategist of Absolute Strategy Research, wrote that since October 2022, U.S. stocks have risen by more than 100%, and if counted from the end of the 2009 financial crisis, the total increase reaches 10 times.

The current bull market is driven by two main factors: robust corporate profits fueled by AI technology and a relatively loose monetary policy environment. He warns, although the market may be in an "endgame" phase, the "endgame" has not yet arrived.

For investors, this judgment means that systemic risk remains controllable in the short term, but one must closely watch for unexpected changes in the interest rate path and potential deterioration in client profits for AI-related industries—the latter could be an early signal for the next market reversal.

Valuations have entered extreme territory, but high valuations do not equal a turning point

U.S. stock valuations have far exceeded historical averages. Based on actual earnings in the past 12 months, the price-to-earnings ratio is 28.4 times, about 40% higher than the average of the past 40 years; using the cycle-adjusted 10-year average earnings, the PE ratio reaches 41 times, a premium of about 60%. Even based on future earnings forecasts, current valuations stand at 20.3 times, still about 25% higher than the historical average. Furthermore, price-to-book, price-to-cash-flow, and other valuation indicators are also at historic highs.

Ian Harnett pointed out that such extreme valuation levels have historically only occurred near major bull market tops. However, high valuations are a necessary condition for a market reversal, but not a sufficient one. To disrupt the current strong upward momentum, a significant change is required in interest rate expectations, corporate profit outlook, or AI sector fundamentals—any one is indispensable.

Interest rates must surge sharply to "kill" the bull market

The market has long debated the interest rate trigger point, but Ian Harnett believes there is no single "critical interest rate" that can be fatal—the real cause of market turmoil is always the speed and magnitude of interest rate changes.

Looking back at the past 125 years of major bull market tops, each was accompanied by a sharp rise in policy rates. The market reversals in 1907, 1929, 1973, and 2000 all occurred after policy rates rose by 2 to 4 percentage points. By contrast, current futures markets have priced in only about a 0.5 percentage point rate hike—far from the magnitude historically required to end a bull market.

He also pointed out that if the Federal Reserve under new Chair Waller continues to "lag behind the curve" by maintaining a relatively loose policy stance, this will provide room for the bull market to continue in the short-term. Even with expected corporate profit growth as high as 21% in the U.S. over the next year, historical patterns would normally prompt the Fed to raise rates more aggressively, but current market pricing has not reflected this pressure.

The AI bubble burst is a deeper risk, but has not yet been triggered

Ian Harnett believes that if this bull market ends, the core trigger will be the bursting of the AI "bubble". Currently, AI-related corporate profits remain robust, with healthy sales growth. But investor concerns about the scale of AI capital expenditures, capital market financing pressure, and the cash flow of super-large cloud computing companies are rising.

In terms of liquidity, the short-term market pressure risk is limited. Even if companies like Anthropic, OpenAI, and SpaceX raise a combined $200 billion via IPOs, according to Fed data, U.S. retail investors still hold about $2.3 trillion in investable cash, and institutions another $6 trillion, so ample funding supply makes a major market shock unlikely.

However, Ian Harnett cites the historical lessons of the bursting internet bubble: The real risk often doesn't come from AI companies themselves, but from the profit deterioration of their potential client base. He advises investors to focus on the profitability and cash flow trends of AI-heavy industries such as finance, manufacturing, media, transportation, education, and healthcare—once these sectors show clear slowdowns, it will be a more reliable warning signal for the end of the bull market.

Geopolitical shocks have not shaken the market; external risks remain controllable

The escalation in Iran has not become a "black swan" ending this bull market. Ian Harnett analyzes that the recent increase in oil prices—both its magnitude and its persistence—has been insufficient to cause substantial damage to economic activity or significantly boost market expectations for interest rates.

From a historical perspective, the recent oil price increase is about 63%, far lower than the roughly 100% rise in 1990, and nowhere near the roughly 300% increase in 1973–1974. This means that current geopolitical shocks have a limited transmission effect on macroeconomics and monetary policy, and do not pose a systemic threat.

In summary, Ian Harnett concludes: The AI-driven bull market is likely to continue; the market may be in the endgame phase, but the endgame has not yet played out.

Risk warnings and disclaimerThe market has risks, and investors must be cautious. This article does not constitute personal investment advice, nor does it take into account any user's particular investment goals, financial situation, or needs. Users should consider whether any opinion, viewpoint, or conclusion in this article is suitable for their specific circumstances. If you invest based on this, you assume all responsibility yourself. ```