Global Market Exuberance Rising, But Not Yet Excessive

Overview

This Citi Global Equity Strategy report updates its proprietary "Bear Market Checklist" (BMC) to assess the potential risk level of current global equity markets. The report points out that although global stock indices are near all-time highs and market sentiment is increasingly optimistic, multiple indicators show the market is in the most "bubbly" state since the global financial crisis, but overall has not yet reached extreme levels seen before past bear markets. Therefore, the institution currently maintains a constructive view on global equity markets but warns that risks are accumulating.

Core views

Citi's Bear Market Checklist (BMC) measures market frothiness through 18 indicators (including valuation, sentiment, credit spreads, yield curve, flows, corporate fundamentals, and financing activities). The current global BMC score is 10/18, the highest level since the Global Financial Crisis (GFC). Regionally, the US market is significantly hotter, with a BMC score of 11.5/18, compared to Europe's more moderate 5/18, showing significant divergence. Key factors driving the increase in warning signals include: significant growth in capital expenditure in the AI sector, IPO activities of several large US tech companies moving the indicator into the "amber" (semi-warning) zone, and strengthening investor sentiment (reflected in stronger capital inflows, broadly bullish analyst consensus, and the Levkovich index entering the "euphoria" range). However, not all signals point to risk. The report specifically notes that credit spreads remain narrow, which is a positive signal. Additionally, while some indicators like ROE and PE have been high for some time, many others have just begun to heat up. Historical experience shows that true market tops are usually not triggered by a single indicator but by multiple indicators simultaneously entering extreme zones.

Analysis framework

Citi's analytical framework is not intended to predict market turning points or for market timing, but rather to provide investors with decision references during market corrections. Each indicator in BMC has thresholds based on historical data; when an indicator crosses the first threshold, it is marked as "amber" (half-point warning), and if it worsens further, it is marked as "red" (full-point warning). Summing all warning signals gives a comprehensive risk score. The report emphasizes that only when most indicators (such as those in 2000 and 2007) simultaneously issue sell signals should true bear market risks be watched. Although the current 10/18 score is concerning, it still has a gap from the 13-17.5 scores seen before historical bear markets. Therefore, strategists believe current market corrections should still be viewed as buying opportunities, but close attention should be paid to whether warning signals continue to increase rapidly.

Methodology notes

• Industry/Industry Analysis FrameworkSupply-demand framework

  Market tops confirmed by multiple indicators

  The implicit view of this report is that major tops in equity markets are not determined by a single factor (such as high valuations), but require multiple dimensions of indicators including valuation, sentiment, corporate behavior, and macroliquidity to simultaneously enter extreme states to be confirmed. This reflects the common sense of financial market complexity, reminding investors not to turn prematurely pessimistic due to a single indicator overheating.

• Cycle and Prosperity FrameworkTurning Point Analysis

  Warning signals have accelerating effects

  The report points out that once the total number of BMC warning signals breaks into double digits, it historically tends to accelerate rapidly. This is a typical positive feedback mechanism, meaning market sentiment and behavior may self-reinforce after a certain critical point, with risks increasing nonlinearly and sharply. This has important implications for investors' risk management.

• Valuation methodsPE/PEG valuation

  Comprehensive use of multiple valuation indicators

  The BMC framework does not rely on a single valuation indicator, but simultaneously examines multiple dimensions including forward PE, trailing PE, CAPE (cyclically adjusted PE ratio), and dividend yield (DY) to more comprehensively assess market valuation levels. This multi-indicator cross-validation approach can effectively avoid the limitations of single indicators.

Key data

• Global BMC Total Warning Signals10/18Highest level post-GFC
• US BMC Total Warning Signals11.5/18Significantly above global average
• Europe BMC Total Warning Signals5/18Relatively moderate
• Global Capex Year-over-Year Growth21%Mainly driven by AI sector
• US Capex Year-over-Year Growth33%Mainly driven by AI sector
• Pre-Bear Market BMC Peak2000: 17.5/18; 2007: 13/18Current level still below this

Impact & implications

The report believes that although the current market environment has rising risks, it has not yet reached a point of being completely bearish. For investors, this means they can continue to maintain allocations to global equities, but need to be more vigilant, especially when market corrections occur, and cannot unconditionally "buy on dips" as in the past. If more indicators turn red and the BMC score continues to rise, the nature of market corrections might fundamentally change, at which time greater caution should be exercised.

Risks

• Massive capital expenditure in the AI sector may lead to future debt problems or investment returns below expectations
• Concentrated IPOs from large tech companies could put pressure on market liquidity
• If credit market conditions deteriorate (such as problems in the private credit sector), it will quickly push up the BMC score
• Market sentiment could shift rapidly in the short term, leading to accelerated accumulation of warning signals

What to watch

• Whether the total number of BMC warning signals continues to increase and surpasses 12
• Changes in credit spreads (especially for high-yield and investment-grade bonds)
• Sustainability of AI-related capital expenditure and its financing situation
• Actual execution progress and market reaction of large IPOs