The Party Isn’t Over Yet, But Late-Cycle Risks Are Building On Wall Street

Josh Brown, CEO of Ritholtz Wealth Management and a regular CNBC contributor, shared a notable market observation in a recent interview: the bull market rally is still ongoing, but latent risks have emerged.

Brown noted US equities remain in a bullish sweet spot backed by solid corporate earnings and sturdy market performance, yet the market is marching toward the late phase of the current bull cycle. While headline corporate results stay resilient, underlying financial conditions have turned restrictive, weighing on future earnings growth momentum. He added that historically, equity markets tend to build up tail risks once rallies are fueled by valuation expansion, instead of fundamental earnings improvement.

US stock fundamentals still look solid on the surface. In a June 12 research note, Goldman Sachs strategist Ben Snider stated thatrecord-high corporate profitability underpins lofty US equity valuations.

l The S&P 500 trades at a forward P/E ratio of roughly 21x, ranking at the 87th percentile of historical readings since 1980

l The index-wide return on equity has climbed to an all-time high of 22%

One critical flaw lies beneath upbeat aggregate data: the entire earnings upgrade cycle is dominated by a handful of large-cap stocks. AI bellwethers including Nvidia and Micron Technology account for the vast majority of upward earnings revisions year-to-date.

l The top 10 S&P 500 components make up nearly 40% of the benchmark’s total market cap, well above the 27% peak seen during the 2000 dot-com bubble

l Nvidia alone contributes around 20% of the S&P 500’s total year-to-date return

Bank of America figures show the relative performance spread between the top quintile and bottom quintile tech stocks has widened to nearly 120 basis points, the widest gap since February 2000. Capital is clustering into elite AI-driven names at an unprecedented pace, while most public firms fail to benefit from the ongoing AI market boom.

Systemic Liquidity Conditions Are Drying Up

Tightening liquidity is another underpriced market headwind.

In a recent report, Mike Wilson, Chief US Equity Strategist at Morgan Stanley, confirmed a clear liquidity contraction trend. The Fed has cut its monthly reserve management asset purchases from $40 billion to $10 billion, while the US Treasury has halved its bond buyback size. Combined with cooling bank credit extension, domestic liquidity keeps shrinking.

Wilson warned tightening liquidity, rather than Fed inflation-fighting rate hikes, will serve as the biggest near-term risk for risk assets.

Historical Signals: Classic Late-Bull Traits Appear

Three classic features consistently seen at previous bull market peaks have surfaced in current markets: extreme market concentration, valuation outpacing earnings growth, and deteriorating liquidity conditions.

Goldman Sachs also flagged margin pressure for hyperscale cloud enterprises. Depreciation and amortization costs as a percentage of revenue are estimated to rise from 7% in 2022 to 12% by 2027. Even with steady revenue expansion, mounting capital expenditure burdens will squeeze corporate profit margins gradually.

For short-term US equity investors, Josh Brown’s late-cycle reminder carries more practical value than binary bull/bear calls. The market’s next direction hinges on two core factors: whether earnings growth can keep pace with valuation expansion, and whether liquidity tightening evolves faster than market consensus expects.