Be careful chasing stocks while the S&P 500 is above 5,500: BCA

Investing.com – As the S&P 500 ebbs and flows around the 5,500 level, BCA warns against chasing stocks above this level as the winds of recession are picking up pace and the cooling 'AI mania' suggest the end for U.S. stock market exceptionalism is on the horizon.

The S&P 500 was marginally lower on Thursday at 5,500.18, but has jumped about 16% year to date, but further gains will likely be harder to come by.  

"Be careful chasing stocks above our end-of-the-year target of 5,500 for S&P 500," BCA analysts cautioned in a note, flagging worries about growing recession risks.

The slowdown in government spending and business investment, two key components of GDP, has boosted the risk of recession, according to BCA. While the consumer, the backbone of the U.S. economy, remains robust, signs of weakness in the labor market could trigger a pullback in consumer spending.

"As consumers notice fewer of their colleagues rage quitting and carrying off the proverbial gold fish in a zip-lock bag, they may decide to stop shelling out cash on Taylor Swift concert tickets and staycations in five star hotels," BCA added.

The ongoing "AI mania", led by Nvidia (NASDAQ:NVDA), has been a fertile ground for the stock market's outperformance, or U.S. exceptionalism, versus the rest of the world. However, this trend "is unlikely to last," according to BCA, who described AI as essentially a "better paper-clip guy."

Beyond the macro, stocks are also battling seasonality factors that show September and October as challenging months, exacerbated by political uncertainties surrounding the upcoming U.S. elections and elevated interest rates.

BCA also flagged that "too many investors remain bullish" and "still only a few are short stocks," setting the stage for a potential market correction as the S&P 500 hovers around 5,500.

A quick look at history suggests these concerns are credible, as the old adage 'greed is at its peak when the market is at its peak' appears to be setting the stage for an entrance, potentially capping further gains above this key level.