Multiple models and share market signals are flashing red for sell as US tech valuations race ahead to record levels, according to Chris Watling, the chief market strategist at Longview Economics.
Watling is cautioning investors to hold fire if they're sitting on spare cash, as data suggests the US economy is slowing as inflation lingers to cloud the market's desire for interest rate cuts from the US Federal Reserve.
Overnight Tuesday, the tech-heavy US Nasdaq Index fell 1.5% as popular trades like Nvidia and Palantir lost 3.5 and 9.4% respectively in a single session, while risk bellwether Bitcoin extended a slide that's pushed it 6% lower over the past week.
Trade volumes are falling
This week, Watling outlined multiple factors to suggest the US equity market's wobble may extend through the rest of the year.
First, he says falling trade volumes in recent months are a sign that risk appetite is waning as valuations soar.
"Historically this occurs just prior to major pullbacks," says Watling. "Consistent with high levels of risky exposure already being in place in portfolios, by last Friday, S&P 500 e-mini daily traded volumes had fallen as low as 1.35 million contracts (using a 75-day moving average). The last time volumes dipped to similarly low levels was in January this year, just ahead of the ‘February – April’ major sell-off."
Valuations are frothy, yield spreads are tight
Everyone loves a raging bull market, but Watling is also warning basic valuation metrics and common sense suggest stocks are due a fall.
The economist points to a Goldman Sachs chart showing that more than 20% of MSCI World stocks are trading above 10x enterprise value-to-sales.
That's a lot of expensive stocks out there and a similarly high amount to 2021, right before the market crashed in 2022.
Another valuation metric worrying Watling is the spread (difference) between yields on US government debt and high-risk corporate debt.
He says the current spread between the two is 286 basis points, which is very tight and suggests investors are taking a lot of risk as they're demanding less compensation - in the form of higher yields - for high-risk debt.
Fig 1: US high yield corporate bond spreads shown with US recessions
Technical models flash sell
Watling adds that his sector and single stock correlation models for the S&P 500 are also flashing sell.
"That implies that there’s widespread [directional] divergence between stocks and sectors, and a narrowness to the advance in the market. This often occurs ahead of a pullback in the headline index," he told investors in a note.
Complacency is widespread in markets
In this share market almost everyone feels like a stock-picking master as everything they own goes up.
However, Watling warns complacency is another classic sign of a coming correction.
He points to another model of his that compares the S&P 500’s forward price-to-earnings ratio relative to the VIX Index of volatility that also suggests US stocks are likely to fall.
"When forward-dated implied volatility (e.g. 6 month VIX futures) is trading above near-dated volatility (i.e. spot or 1 month futures). This often takes place just before the market rolls over [into a phase of weakening]," he says.
Other Longview models point to sell
Other market timing models mean US shares are posting bubble like characteristics after a curious bull run in the face of a US trade war, according to Watling.
He says equities are overbought relative to bonds yields as the equity risk premium compresses, while the medium-term put-to-call ratio is also flashing sell.
The next risk hurdle for markets to navigate is a speech from US Federal Reserve chairman Jerome Powell on Friday.
"An absence of clear support for rate cuts in September (and later this year from Powell) could potentially spark weakness in this market," he adds.
Finally, and as we hit the middle of the third quarter of 2025, Watling warns the US Treasury is set to issue US$1.04 trillion of new debt this quarter, versus initial estimates of US$554 billion.
All that new debt being issued will need to be bought by investors, which may drain liquidity from equity markets and lower bid prices later this year.
Therefore, Watling says his technical models and the macro-economic backdrop of a slow down in the US warrant a lot of caution right now.
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