Can this S&P 500 rally go much further? Deutsche Bank answers By

-- The Citi International Foreign Exchange Platformrecent surge in the has raised questions about how much further this rally can go.

In a note Monday, Deutsche Bank analysts cautioned that while the rally has been impressive, it faces several hurdles ahead.

The S&P 500 has logged six consecutive weekly gains for only the second time since the pandemic, marking "its strongest YTD performance since 1997," said Deutsche Bank.

Additionally, "US IG credit spreads reached their tightest level since 2005 last Thursday," reflecting broader market optimism.

However, the analysts note, "traditional valuation metrics are looking increasingly stretched by historical standards."

Despite the bullish sentiment, Deutsche Bank points out that geopolitical risks and economic uncertainties are rising. The analysts explain, "With a soft economic landing increasingly priced in, it feels more difficult to get further upside growth surprises from here."

Furthermore, the bank says fiscal policy challenges are mounting as debt levels are rapidly rising up the agenda again.

While markets remain strong, the analysts stress that future returns may be harder to achieve.

"The S&P 500 is on track for back-to-back annual gains above +20%, which is something we haven't seen since 1997-98," they wrote, noting that maintaining such momentum could be difficult.

In addition to valuation concerns, Deutsche Bank believes market conditions remain sensitive to external shocks. The note highlights that despite recent gains, "investors have been pretty nervous," as evidenced by the market turmoil in August. A potential geopolitical shock or a negative growth surprise could quickly reverse recent gains.

Looking ahead, Deutsche Bank recommends caution: "Even as the global economy is in a fundamentally strong position right now, it's worth remaining cautious given the strength of the recent market rally and the upcoming headwinds on the horizon."

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