The market is currently at a critical juncture. The multiple positive drivers that have continuously propelled the stock indices upward may be approaching a state of exhaustion, where too much of a good thing could lead to a reversal.

This discussion is not about the speed of the rally—for instance, the S&P 500's nearly 20% rebound from its March 30 low and its nine consecutive weeks of gains. The core concern lies in the fundamental, technical, and macro-logical underpinnings of the market: high earnings growth, semiconductor leadership, and accommodative credit conditions. These driving forces are likely to become overheated and overextended, potentially dragging down future returns.

Corporate Earnings

The bullish strategists have a point: the current S&P 500 rally is underpinned by a significant acceleration in corporate profits. Driven by massive AI infrastructure investment and rapidly rising cloud service adoption, full-year earnings growth expectations have been revised up from 17% on March 31 to over 22%.

Such rapid profit growth, excluding periods of emerging from recession or clearing macro headwinds, is historically rare. While some of the outperformance stems from non-recurring gains on investments in leading private AI giants, not all the incremental growth is attributable to this factor.

The profit surge has pushed the S&P 500 10% above its previous high from October 29 last year, while its forward price-to-earnings ratio has declined from over 23 times six months ago to 21.4 times.

"Stock prices follow earnings" is a widely accepted principle in investing. However, once earnings growth exceeds a reasonable threshold, it becomes difficult to continue driving stock prices higher, much like how a high-protein diet is healthy, but extreme overconsumption can be harmful.

Ed Clissold, a U.S. stock strategist, notes that historically, when S&P 500 year-over-year earnings growth has exceeded 20%, subsequent annualized returns have averaged only about 2%. Investors generally price in the expectation that high growth rates cannot be sustained long-term.

The decline in the P/E ratio itself is logical. The previous valuation above 23 times had already priced in the subsequent earnings boom, which is now materializing. That high valuation also relied on robust free cash flow behind the earnings reports, but with the entire industry making massive capital expenditures toward AI, free cash flow growth has stalled.

Furthermore, an increasing proportion of profit gains coming from supply-constrained sectors like semiconductors can also suppress valuation multiples. The strategist explains, "If more and more of the earnings growth is coming from highly cyclical industries like semiconductors or energy, the market should assign a lower P/E ratio."

From a macro perspective, the rapid expansion of corporate profits continues to increase the share of profits in GDP, a ratio that has reached a multi-decade high. To predict several more years of abnormally high earnings growth is essentially to bet that structural economic changes will allow corporate profits to persistently outpace worker wages, maintaining the current unprecedented imbalance.

Semiconductor-Led Rally

The strength of a bull market is often gauged by the performance of the semiconductor sector, which reflects cyclical conditions, technological innovation, and market risk appetite.

There is a difference between steady sector leadership and a short-term vertical surge. The Philadelphia Semiconductor Index surged 69% over April and May combined. Historically, a two-month gain exceeding 60% has only occurred once before, near the peak of the internet bubble in early 2000.

Using a quantitative measure of excess returns, a strategist states, "This cycle's semiconductor SERM indicator has risen to the 95th percentile historically, confirming the parabolic surge. It has now entered a risk zone. While this doesn't equate to an immediate short signal, history suggests it is very difficult to replicate such high returns over the next 12 months."

Once a deeply overbought semiconductor sector experiences a significant correction, it could drag down the entire market through high-beta, high-momentum stocks, easily triggering sharp volatility.

However, the short-term market structure appears relatively healthy. On a recent Monday, software stocks showed strength, while semiconductors saw internal divergence—with some rising and others falling, providing some offset within the sector.

This serves as a risk warning, not a sell signal.

Stock Correlations

When individual stocks diverge, moving independently based on their own fundamentals rather than rising and falling in tandem with the macro environment, it is typically a sign of a healthy market. However, even this divergence has its limits.

The CBOE three-month implied correlation index, which measures the degree of co-movement among stocks, has fallen to extreme lows. This represents an environment of extreme stock-picking or one dominated by passive fund flows and mechanical rotations.

Such extreme divergence suppresses market volatility and boosts risk appetite, but this market structure is fragile and prone to rapid reversals once it breaks. The previous low point occurred in late July 2024, when the market was driven solely by mega-cap tech stocks in an extremely concentrated rally, followed by a quick 6% index pullback and two months of sideways consolidation.

Accommodative Credit Conditions

Cyclical sectors have not been entirely immune to cost pressures from rising oil prices, higher Treasury yields, and fading Fed rate cut expectations: discretionary stocks have retreated an average of 8% from their highs, and financials are down about 6%.

However, the broader capital markets show no systemic macro headwinds. The credit spread for investment-grade corporate bonds has fallen to the low for this cycle, meaning the bond market's safety cushion to absorb sudden negative shocks is extremely thin.

While the aforementioned positive factors show signs of overheating, it does not mean optimism will collapse instantly. AI industry fervor combined with a wave of massive upcoming IPOs could still sustain bullish trading sentiment. Uncertainties, such as shipping disruptions in key straits and potential liquidity drains from large IPOs, also provide temporary logic for defensive positioning.

But the market can never escape one规律: a行情 that starts with "strong fundamentals" will eventually reach a point where "positives have peaked, with no room for further improvement."