Despite the increase of 24.72% since the beginning of the year, $S&P 500 Index (.SPX.US)$ the main driving force behind the continuous rise of the US stock market is close to exhaustion, indicating a significant decrease in future investment return. This is the opinion of the renowned American economist David Rosenberg.

Rosenberg, who accurately predicted the US housing bubble and was the former chief analyst for North America at Merrill Lynch, warned on Wednesday Eastern Time that investors should prepare in advance as the upside potential for the US stock market in the near future may be limited.

Rosenberg pays special attention to recent valuations, interest rates, and tax-cut space in the US stock market, believing that the driving force behind the rise in US stocks is running out.

He believes that the bullish momentum that has propelled the recent rise in US stocks is almost depleted, which may put downward pressure on corporate profitability and consequently affect stock prices.

US stock valuations have reached high levels.

Rosenberg points out that the forward PE ratio of the s&p 500 index is 22.3 times, more than one standard deviation above its long-term historical level, the highest level since the peak of the technology bubble following the outbreak of the COVID-19 pandemic in 2021.

With US stock valuations already so high, the extremely bullish sentiment in the stock market has even exceeded the levels before the financial crisis. In Rosenberg's view, this means that there is very little room left for further increase in US stock valuations.

"There is no further room for expansion," Rosenburg said.

Rosenburg believes that if the valuation of the US stock market wants to further increase, it will largely require sustained growth in the profitability of US stock companies. However, he states that there are reasons to believe that this is unlikely to be achieved.

Trump's tax reduction space is limited.

Over the past few decades, the tax rate of US stock companies has been decreasing, which has boosted corporate profits and helped push up stock prices.

Although after Trump won the election, the market widely bet on his tax reduction plan to further enhance corporate profitability, Rosenburg believes that the market may be too optimistic about the prospects for rate cuts.

Effective tax rate of US S&P 500 companies

He pointed out that the tax rate faced by US companies is already very low, which means that there is not much space for further tax cuts. Secondly, as of now, according to forecasts from Reuters and other media outlets, the Republicans have only obtained 218 seats in the House of Representatives, just a slim majority, which means that Trump's tax reduction bill may not necessarily smoothly pass through Congress.

"The slim majority in the House of Representatives and the already low tax rate mean that this path is much shorter than many people expected," Rosenburg said, given that the current actual corporate tax rate in the USA is only 17%, even if the Republicans were to control both the White House and Congress, there is hardly any room for further reduction in the USA's tax rate.

The future of the Federal Reserve's interest rate cuts is uncertain.

For a long time, the Federal Reserve's interest rate cuts have been helping to boost the stock market, but this round of interest rate cuts may be shorter than many people imagine.

Although the Federal Reserve is cutting interest rates, Rosenburg believes that from a long-term perspective, the Federal Reserve's interest rates are already close to historical lows, indicating that there is not much room for further interest rate cuts - especially if elected President Trump implements measures such as tax cuts and tariff hikes, which will further raise inflation, making it more difficult for the Federal Reserve to cut interest rates.

Although the current Federal Reserve interest rate is higher than the low point in 2021, it is still at the lower end of the historical range. Currently, the yield on 10-year US Treasury bonds is 4.3%, less than half of the average level of 10.6% in the 1980s.

The yield on the 10-year US Treasury bond is currently at a historically low range.

In summary, Rosenburg believes that unless the future tax cuts and interest rate cuts in the USA significantly increase the operating profit of businesses, it is unlikely that the stock market will rise significantly in the future.

"US consumers are paying more and more attention to the cost of living, and the net profit margin of businesses is already at historical highs, so it seems to be a daunting task for businesses to further increase profit margins," Rosenburg said, "Currently, the three levers to increase the return on US stocks seem to have reached their limits."

Editor/rice