Stocks have rocketed back to record highs, but the market’s next chapter might entail a long period of underperformance, strategists at Ned Davis Research said.
The investment research firm pointed to several red flags suggesting a secular bear market — a prolonged period of negative returns — could be approaching. In a note to clients this week, the firm outlined several parallels it sees to past market peaks that preceded long bear markets, such as the stock bubbles of 1929 and the early 2000s.
If a secular decline were to appear, it would end one of the longest-ever secular bull markets, NDR said. Though US markets slipped into a brief bear market in 2022, stocks have been on a broader uptrend since 2009, the second-longest secular bear market in the last century, the firm said.
“There are a few consistencies to be aware of, along with historical extremes warning that the market is overbought, overowned, and overvalued. That also described market conditions before previous secular tops,” Tim Hayes, the chief global strategist at the firm, wrote.
Here are the warning signs on NDR’s radar:
1. The US is underperforming relative to emerging markets
Returns in the US market are lagging those in emerging markets, a trend consistent with a secular bear market, NDR strategists said.
The iShares MSCI Emerging Markets ETF is up 16% from levels at the start of the year, outstripping the 12% gain in the S&P 500.
2. Tech is starting to lag, while energy is outperforming
The tech sector, meanwhile, has been volatile as investors rotate out of expensive, crowded trades in areas like semiconductors, memory firms, and other AI-linked stocks. The iShares US Technology ETF is down 3% from its recent peak.
However, defensive sectors have been among the market’s best-performing trades, another trend consistent with a secular bear regime. The energy sector of the S&P 500, for instance, is up 7% over the last month, the firm noted, calling it a “bear signal.”
3. Valuations are near “extremes”
Valuations among large-cap companies have steadily grown more extreme. The cyclically-adjusted real earnings yield and the dividend yield for the S&P 500 — two measures that generally decline the more highly the benchmark index is valued — are both approaching the “extremes” that preceded the peak of the dot-com bubble, per NDR’s analysis.
“The S&P 500’s cyclically-adjusted real earnings yield and dividend yield would add bearish warnings by reversing with positive year-to-year point changes,” the firm said, adding that the evidence of a market “top” would strengthen if measures of market cap to gross domestic income or market value to net worth were to also decline.
4. Government spending is headed in a bearish direction
Government spending is rising alongside the budget deficit, two other signs that have historically been associated with secular bear markets, NDR said.
Government spending as a percentage of GDP clocked in at around 22% in 2025, according to data from the US Office of Management and Budget. The federal budget deficit, meanwhile, totaled $1.4 trillion through the end of June, a 3% increase compared to the prior year, according to the Bipartisan Policy Center.
5. Yields are rising
Rising Treasury yields are another signal, and suggest investors are growing more concerned about rising deficit spending and the outlook for inflation.
The 10-year US Treasury ticked higher to 4.64% on Thursday, above the key psychological threshold of 4.5% closely watched by markets. The 30-year US Treasury yield, meanwhile, is hovering around 5.18%, near its highest levels since the Great Financial Crisis.
Higher yields denote expectations for higher interest rates, a negative for risk assets like stocks.
“In a similar secular bear scenario, the rising yields would shift the market’s momentum from positive to negative, with record highs no longer attained and the market and sector leadership trends remaining consistent with a bear. With real economic growth losing momentum, the extreme valuation would no longer be tolerated and the biggest stocks would weigh down the indexes, driving the index funds to sell,” NDR wrote.
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