- The stock market's postelection rally appears disconnected from fundamentals, David Rosenberg said.
- He pointed to signs of weaknesses among businesses, with "zombie firms" on the rise in recent years.
- Stock investors may be too optimistic about Trump's pro-business policies, he said.
The rally in the stock market fueled by Donald Trump's election win looks increasingly disconnected from reality, according to economist David Rosenberg.
The Rosenberg Research founder voiced concern over the postelection rally, with the major stock indexes notching fresh highs in the week after Trump secured his second term as president.
The blistering surge in stock prices is ignoring key signs of weakness among US businesses, Rosenberg said in a note to clients on Tuesday. In particular, he pointed to "zombie companies." The term refers to firms saddled with high debt loads that don't generate enough revenue to cover their interest expenses, and their numbers have risen in the last decade.
An Associated Press analysis found that around 7,000 publicly traded companies globally qualified as "zombies" in 2023, with around 2,000 of those in the US. That was around 30% higher than the number of zombie firms recorded in the US a decade earlier.
Rosenberg said the trend is a worrying sign for credit markets, and many small-caps are already among the ranks of zombie firms.
"A worrying revival of the 'zombie company' phenomenon has
begun. Out of 3000 companies in the Russell 3000, roughly 600 are now in the ranks of the 'walking dead' — that's about 50% more than before the GFC unfolded," Rosenberg said.
"This just clearly goes on to show that the current euphoria is disconnected from reality and is based on hopes of lower regulations and taxes from the new government. But with a razor-thin GOP majority in the House and fiscal conservatives on both sides of the aisle, this looks unlikely from where we sit."
Other market forecasters have warned that the rally driven by Trump's election win could eventually fizzle out, especially given already-lofty stock valuations. Bill Smead, the chief investment officer of Smead Capital Management, told BI that the "Trump bump" was pushing the bubble in stocks to the extreme, potentially setting up investors for years of anemic returns.