Stocks are mirroring prior bubbles as the Fed is too 'loosey-goosey' with liquidity, top strategist says

• The stock market is flashing similarities to historic asset bubbles, SocGen's Albert Edwards warned.
• That could be a sign the Fed's monetary policy isn't nearly tight enough, he said.
• The Wall Street bear has been cautioning around a recession and coming stock correction for months.

Stocks are mirroring historic bubbles with the Fed's monetary policy not nearly as tight as markets think, according to Albert Edwards, a global strategist at Societe Generale.

Edwards, who is among Wall Street's most bearish forecasters at the moment, pointed to the large run-up in stocks over the past year, with the S&P 500 gaining 27% from its trough in October 2022. 

But soaring stock prices could be a warning that the Fed's monetary policy is too lax, he warned, pointing to the central bank's balance sheet reductions and expectations for Fed rate cuts to come later this year, both of which loosen financial conditions.

That may explain why the S&P 500 has notched a series of record-highs this year, and why the total money stock — a measure of liquidity in the economy — has jumped 10% over the last year, according to Federal Reserve data. 

"The current narrative centres on the anticipation of an AI-driven surge in corporate profits to fully justify the current stratospheric valuations. Those of us who lived through the late 1990s TMT bubble have heard it all before and roll our eyes skyward," Edwards said in a note last week. "The Fed may have been playing 'loosey-goosey' with liquidity this last year," he added.

Investors have hinged the bull market on the tail of the so-called "AI revolution," but Edwards says there are signs that analyst optimism and corporate earnings expectations are beginning to slow. The percentage of analyst estimate changes that are upgrades has fallen below 50% in the S&P Composite, he noted.

"All I can say is that for analyst optimism on the S&P 500 to have topped out only at 50% before subsiding is not the stuff of normal cyclical recoveries, let alone an AI 'new era,'" Edwards warned. "Is this anaemic profits backdrop really consistent with the S&P rising by one third in a year? Maybe it's all about Fed-induced liquidity after all?!"

Edwards, who was among the few on Wall Street who foresaw the dot-com crash, has been warning for years that stocks could be in a similar bubble, especially amid the market's frenzy for artificial intelligence. That suggests stocks could be set up for a major correction, especially if the US tips into recession, he previously warned.