The financial markets are reaching record highs, but concerns about potential overvaluation are rising, particularly as the August 1, 2023, U.S. trade deadline approaches. Megan Horneman, Chief Investment Officer at Verdence Capital Advisors, which manages $4.1 billion in assets, expressed worries over the current market dynamics in an interview with CNBC on Monday.
Horneman cautioned that the market seems to be pricing in an overly optimistic scenario. She noted that there is a sense of complacency surrounding the upcoming tariff decisions, which could have significant implications for U.S. economic performance. “This market is pricing in the perfect situation,” Horneman stated, highlighting additional uncertainties regarding Federal Reserve policy and the technical indicators suggesting overbought conditions in growth stocks.
As the market braces for potential shifts, Horneman indicated that if the possibility of interest rate cuts diminishes, combined with tariff uncertainties, a valuation correction could be on the horizon. “Once we see that [rate cuts] might be priced off the table…I think you can see a bit of a valuation correction,” she explained.
Horneman’s analysis particularly focuses on the current state of growth stocks, including major technology companies, which she believes are exhibiting signs of overvaluation. “These are things that we think might upset the rally that we’re seeing here,” Horneman added.
Despite her short-term concerns, Horneman maintains a long-term bullish outlook. She views market pullbacks as opportunities and emphasizes international stocks as potential beneficiaries of market weakness. “I’d warn that right now, they’re expensive from a valuation perspective [but] cheap compared to the U.S.,” she noted, referring to the long-standing underperformance of international equities. “They’ve been underloved for way too long, and I think you’re seeing some of that rotation just begin.”
In addition to Horneman’s insights, fellow trader Guy Adami also expressed caution regarding the market’s current trajectory. He pointed to the influence of retail investors on recent market gains, suggesting that valuations have become “a tad frothy.” The S&P 500 index recently closed at record highs, reflecting a 16% increase over the past three months, while the tech-heavy Nasdaq has surged by 21% during the same period.
In navigating the uncertain landscape, Horneman advises investors to ensure their portfolios are appropriately allocated to withstand potential volatility. The upcoming trade deadline and its implications for tariffs could play a critical role in shaping market sentiment in the near future.
As investors reflect on these insights, they are reminded of the importance of remaining vigilant amid a market that, while currently buoyant, may be susceptible to significant shifts depending on forthcoming economic developments.
