Stocks are reverting to previous bubbles as Fed is too 'loose' on liquidity, top strategist says

• Albert Edwards of SocGen warns that stock markets are flashing signs similar to historical asset bubbles.

• He said this could signal that the Fed's monetary policy is not tight enough.

• Wall Street bears have been warning of a recession and impending stock market correction for months.

Albert Edwards, global strategist at Societe Generale, thinks the Fed's monetary policy is not as tight as the market thinks and that stocks are reflecting historical bubbles.

Edwards, one of Wall Street's most bearish forecasters at the moment, notes that stocks have risen sharply over the past year, with the S&P 500 up 27% from its October 2022 trough.

But he warned that the surge in stock prices could be a warning that the Fed's monetary policy is too loose, noting that the central bank's reduction of its balance sheet and the Fed's expectation of a rate cut later this year could ease financial conditions.

This may explain why the S&P 500 has hit back-to-back record highs this year, and why, according to the Fed, the amount of money in circulation (a measure of liquidity in the economy) jumped 10% last year.

"The current discourse is focused on expectations of a surge in AI-driven corporate profits to fully justify current valuation levels. Those of us who lived through the TMT bubble of the late 1990s in the 20th century have heard it all before," Edwards said in a report last week, translating the sky." He added: "The Fed may have been 'laissez-faire' on the liquidity side of the equation for the last year.

Investors have pinned the bull market on the tail end of the so-called "artificial intelligence revolution," but Edwards says there are signs that analyst optimism and corporate earnings expectations are beginning to slow. He noted that the percentage of upward revisions in changes in analysts' expectations in the S&P Composite has fallen below 50%.

"All I can say," warns Edwards, "is that analysts' optimism about the S&P 500 reached only 50% before fading, which is inconsistent with a normal cyclical recurrence of a person's name, not to mention the 'new era' of artificial intelligence. " Is this weak profit backdrop really consistent with the S&P rising by a third in a year? Maybe it's all about Fed-induced liquidity!"

Edwards was one of the few people on Wall Street to foresee the collapse of the dot-com bubble, and he has been warning for years that the stock market could be headed for a similar bubble, especially in the midst of the market's mania for artificial intelligence. That suggests the stock market could see a major correction, especially if the U.S. economy slips into recession, as he has previously warned.

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