The market is currently pricing in an 85% probability that the Federal Reserve will cut interest rates in September. While that may be welcome news for investors in the short term, Société Générale strategists are warning it could also push equity valuations into bubble territory over the next year.
Their caution centers around a specific threshold: 7,500 on the S&P 500. That would mark a nearly 19% gain from today’s levels—and signal that valuations have detached from economic fundamentals, similar to what occurred at the peak of the dot-com bubble.
What’s Driving the Concern
1) The Fed’s Next Move
Markets are now overwhelmingly betting on a 25-basis-point rate cut in September, especially after July’s softer-than-expected jobs report. The probability, as tracked by the CME FedWatch tool, surged to 87%, up from 63% just a week earlier.
Société Générale notes that gradual rate cuts could support the market without overheating it. However, if the Fed cuts aggressively toward its terminal rate, the risk is a “valuation bubble,” fueled more by liquidity than fundamentals.
For advisors, this means keeping a close eye on the Fed’s tone and pacing. Rate-sensitive sectors could benefit in the near term, but late-cycle exuberance can quickly shift to fragility.
2) Bullish Conditions Already in Place
SocGen points out that several macro tailwinds are already contributing to strong equity performance. Private sector credit remains healthy, growth expectations are firming, and corporate balance sheets have recovered meaningfully from their cyclical lows.
In fact, the S&P 500’s performance over the last three months supports this thesis, with strategists describing the “crisis of confidence” earlier this year as a short-term disruption.
Since bottoming on April 8—following heightened volatility sparked by tariff-related headlines—the S&P 500 has rallied roughly 28%. That momentum, paired with supportive monetary policy, creates the potential for markets to overshoot.
Valuation Risk Is Creeping Higher
Société Générale’s base case projects the S&P 500 will reach 6,900 by the end of next year, a roughly 9% gain from current levels. But a push to 7,500 would mean the index is trading at multiples last seen in the dot-com era.
For RIAs, that’s an important inflection point to monitor. Stretch valuations can remain elevated for long periods, but when supported by frothy sentiment and excess liquidity, they often end with sharp reversals.
What Advisors Should Be Watching
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Monetary Policy: A gradual rate-cutting cycle could be benign or even bullish for stocks, but an overly aggressive move by the Fed could inflate asset prices beyond sustainable levels.
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Market Internals: Momentum is currently strong, and breadth has improved—but keep an eye on divergences. Narrow leadership and weakening small-cap participation could hint at unsustainable trends.
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Valuation Anchors: Use forward earnings, cyclically adjusted P/E ratios, and long-term trend channels to identify when clients may be overexposed to an overheating market.
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Client Allocation Reviews: In an environment where sentiment could overpower fundamentals, reassessing exposure to high-growth and speculative segments may be prudent. A tilt toward quality and cash-flow-generating assets can provide stability if volatility returns.
While the 7,500 level isn’t guaranteed, it serves as a useful marker for advisors to track. If the Fed delivers rate cuts into an already-strong equity environment, asset prices may keep rising—but the higher they climb, the more fragile the gains may become.
