Economist and longtime market bear David Rosenberg is coming around after this year's blistering stock market rally.
While he says his updated view doesn't amount to "throwing in the towel," he admits that the technology-fueled AI boom is requiring him to reframe his thinking on the broader stock market.
"It's high time for me to stop pontificating on all the reasons why the U.S. stock market is crazily overvalued and all the reasons to be bearish based on all the variables I have relied on in the past," Rosenberg wrote to his clients on Thursday.
Rosenberg has long relied on today's stock market valuations relative to the past to highlight just how historically extreme the stock market is currently valued.
And he's not wrong.
Longtime stock bull Ed Yardeni highlighted five charts this week that showed that valuations have been stretched to historical extremes.
However, according to Rosenberg, the extreme valuations may actually be warranted if AI can unleash a wave of productivity upon the economy.
This idea was echoed by BlackRock in its 2025 outlook, which argued that comparing today's market valuations to those of the past is "apples to oranges" given the profound shift in America's tech-led economy.
Perhaps more importantly, the promise of AI is ultimately leading investors to extend their time horizons beyond the traditional one-year outlook.
"Investors are clearly looking out beyond one year across an entire gamut of indicators and developments, so the classic way we look at valuations may not be appropriate today," Rosenberg said.
Rosenberg added that even if the stock market is in a bubble, it may not be apparent for years to come, similar to the internet bubble that began to form in the mid-1990s before ultimately popping in 2000.
With profits booming for technology companies like Nvidia, the exuberance gripping investors doesn't appear to be extreme or unsustainable.
"A bear market only ensues if and when these expectations prove to have been excessive. That day may well come, but Mr. Market has been saying for some time: 'not quite yet,'" Rosenberg said.
A shift in the Federal Reserve's interest rate policy could also send markets lower, but that doesn't seem to be in the cards in the near term.
Going forward, Rosenberg said he is keeping a more open mind toward the idea that the stock market bull rally could "go further than anyone thinks."
"The way to redress the lament of a bear is to keep an open mind as we head into 2025 and learn from the mistakes of the past year," Rosenberg said.
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