Alessio Rastani and Charlie Burton discuss warning signs and upside potential for stock markets
Trader and analyst Alessio Rastani discusses stock market danger signals and long-term outlook with fellow trader Charlie Burton.
Summary
Alessio Rastani and Charlie Burton examine the current state of stock markets, focusing on warning signs that may signal a future top. Rastani highlights the severe decline in junk bonds as a historically significant bearish indicator, while Burton contextualises this as partly reflecting a capital rotation into AI stocks rather than outright bearish sentiment. Both agree that a market top is unlikely in 2026, with 2027 being the more probable inflection point. Burton raises concerns about rising bond yields — particularly the 10-year Treasury breaking 5% — as a potential drag on both consumer borrowing and stock market capital flows. On the upside, both analysts see a plausible path to S&P 9,000, with Burton citing Paul Tudor Jones's expectation of a blowoff top over the next 12 to 18 months as supporting evidence.
Key Takeaways
FULL TRANSCRIPT
Junk Bonds as a Warning Signal
Alessio Rastani: Does the stock market have the ability to still push higher with everything that's going on? Charlie, one of the most interesting things I'm seeing right now is that there are a lot of danger signals for the markets. One thing I do want to talk about with you in this video is, given the danger signals and the warning signs we're seeing on the market — and I'll show you some of these charts — the question is: does it mean we're reaching a top this year in 2026, or does it mean that we might see a top next year in 2027?
Some people are saying that the S&P could go to 8,000 or 9,000. Forget 8,000 — 8,000 is not far away. But there are speculations the S&P might even go to 9,000, which is possible and even probable. But the question is: which is more important right now, the danger signals or the more immediate bullish signals? That's something I want to talk about with you.
For those of you who don't know Charlie, he's an experienced trader for nearly 30 years, and we're going to discuss the stock market here in this video.
Charlie, I want to talk about the danger signs. One specific danger sign I'm seeing right now is junk bonds. Do you look at junk bonds, just out of curiosity?
Charlie Burton: No, I don't actually. It's not that it's not an important chart — it's just there's only so much analysis that I do for my personal trading. So it's not a piece that I look at, and I'm not going to be able to help you too much. I can comment on it.
Alessio Rastani: Well, I'll tell you why I bring it up. The reason I look at junk bonds is because there is a theory — which I think is correct — that usually when professional investors, for example institutions, are confident about the stock market, junk bonds are bought by investors because they are high yield. HYG is a chart I'll put up for you — HYG, junk bonds or high yield bonds, are typically seen as attractive when investors see the economy as being healthy. However, when investors are worried about the health of the economy, typically junk bonds are sold.
When you look at history — and one of the reasons why professional traders look at history is because it can teach us a lot about the future; one of the books I'm reading right now is called The Philosophy of History by Hegel, who is one of the great philosophers on the subject of history — the fact that junk bonds have been in decline, falling severely, is significant. There might be a bounce, but junk bonds have entered a bear market. It's almost a waterfall decline.
Charlie Burton: There's a reason for that though.
Alessio Rastani: Yeah, sure. Go ahead.
Charlie Burton: One of the reasons is that everyone's investing into AI. AI stocks — and investors can invest pre-IPO and all of that — AI is attracting a lot of money. We're seeing that with the treasury market as well. Treasury yields are going up, and treasuries themselves are going down because they're in competition. Everyone is now in competition for capital. I think there might just be an element where one of the reasons you're seeing junk bond prices go down so much is because investors are just going elsewhere. It's not that they're necessarily bearish or anything like that. It might be that they're all just like a flock of sheep going in one direction, and that direction is AI.
Alessio Rastani: I agree with you. There certainly has been this shift — money flowing towards AI. That's why it's in a bubble, by the way. Those are not my words — I heard one of the guys from The Big Short saying it's a bubble too. But nevertheless, for me, the fact that junk bonds are in a bear market and have been dropping severely is, historically, not a good sign going forward for the stock market. Typically when junk bonds are in severe decline, that's a warning sign. Again, it doesn't mean the top has to occur this year, but it is a major warning sign. So even if the S&P and the major stock markets continue to push higher, I personally think we're reaching a top — if not this year, then in the first part of 2027. That's the way I'm seeing things.
Charlie Burton: Well, I think it's another indication of market breadth. Investors coming out of junk bonds — because if you look at the S&P 500, it's a fairly narrow leadership. Fewer stocks are getting participation because of the percentage each stock attracts. If you take Apple as an example, it's a large percentage, but it's just a few stocks that make up like 50% of the entirety of the S&P. So yes, you can see the cracks elsewhere, but until those big monster stocks start to fall, that's why you can still see the index going higher even if market breadth is deteriorating.
Bond Yields and the Risk to Equities
Alessio Rastani: I agree with you. I think even if we see a pullback or correction in the next several weeks — October is a very volatile month, as we know — the period from the end of October to the end of the year and going into March of next year is the Halloween effect. After the 31st of October, it's usually a bullish period for the stock market. So even if we see some kind of correction or pullback in October, there's still potential for the rally and the stock market uptrend to continue. I'm not seeing a top this year. I'm just saying that a top may occur next year in 2027, which we'll talk about in a separate video.
Charlie Burton: I think the 10-year yield — and the 30-year as well — but the 10-year yield is of course of concern after it recently broke 5%. There's a lot of commentary out there about bond yields pushing higher. Mortgage rates are based on treasury yields, so the cost of financing your mortgage — anyone who's remortgaging, moving house, or taking out a new mortgage is going to be paying higher interest rates. It carries over to corporate borrowing as well. So watch those bond yields, because as they go higher, that acts as a natural squeeze on society.
But it's twofold, because there also becomes a point where if bond yields go higher and higher, big institutional investors might say, "Actually, I'll buy some of that now, because I'm getting 5.5% on my money. It's lower risk than the stock market, and the stock market's trading at 39 times earnings right now. I'll park some more of my money there." And you'll see this natural drift coming back into bonds. There are counterarguments on that, but I do think that becomes a risk to the stock market — because if bond yields go higher, there is a point where large investors do start to pile into bonds, since they're paying out great yields, and that money has to come from somewhere. It might come out of the stock market. That is a concern for stock markets at the moment.
Can the S&P Reach 9,000?
Alessio Rastani: Charlie, very important question: there are some speculations about the S&P going to 9,000. What is your view? Do you think there's a high probability — not just a possibility, but a high probability — of the S&P going to 9,000? Not necessarily this year, but let's say next year, or the first half of 2027?
Charlie Burton: Looking at current levels, that's about 15 to 16% above where we were roughly when we're recording this. That's doable over the course of a year — especially over the last decade, we've seen plenty of years where the S&P has done more than that. So 15 to 16% higher than where we currently are is achievable. And if Paul Tudor Jones is right — the famous fund manager who was looking for some sort of blowoff top over the next year to 18 months when he was interviewed earlier this year — then seeing the S&P up at 9,000 is sort of doable.
I think there are always concerns, and there are cracks. People are concerned about AI, they're concerned about private credit — there's always stuff simmering around. And I'm concerned about valuations. As I've already said, 39 times cyclically adjusted PE ratio is pretty high. But valuation by itself doesn't bring a stock market down — it's other things. So there are concerns, but coming back to your question: do I think there is certainly a probability that we're in a bull market currently? Yes. Does the stock market have the ability to still push higher with everything that's going on? I contest that yes, it does. I'm bullish towards some form of resolution in the Middle East, and I think that will help bring oil prices down, bring inflation down, and that will be a positive over the medium term for the stock market. Whether the stock market then ends up topping at some point — I'll deal with that as and when. But for now, yeah, I would say I'm definitely a bull.
Alessio Rastani: I would agree with you. I'm still remaining long-term bullish, although there could still be some kind of a glitch, a pullback, or correction in the next several weeks. We know October typically can be volatile.