While the BCA’s cyclical stance on U.S. equities remains positive, it is critical to be aware of the high degree of speculation.
BCA’s Equity Speculation Index (ESI) signals that the U.S. stock market’s advance is at a very high risk stage. That said, the ESI can stay in elevated territory for a prolonged period before a market decline unfolds, as it occurred in 2014/2015. The eventual weakness in equities in early 2016 turned out to be a mid-cycle correction. However, the elevated ESI readings in 2000 and 2007 flagged the deep bear markets.
Without a recession on the immediate horizon, given the still upward sloping yield curve, it is premature to expect a repeat of 2000 and 2007. However, a market correction cannot be ruled out. While BCA’s 9-12 month outlook for U.S. equities is positive, investors should maintain some non-cyclical exposure in the event of a short-term market pullback.