The S&P 500 is less than 1% away from its all-time high, but Wall Street remains bullish.
At present, inflation is falling back to the Fed's long-term target, interest rate cuts appear imminent, and corporate earnings, consumers and the broader economy have proved resilient. But risks are also plentiful, with some economists worried about a cooling labor market and a potential recession.
Yet these same economists have been consistently wrong in predicting what could bring down the stock market and the economy.
To assess what investors are worried about as stocks hit new highs, Bloomberg News spoke with experts who have been right over the past few years, including three bullish strategists. Here’s what they had to say.
BMO的Brian Belski
For BMO chief investment strategist Brian Belski, his biggest worry is that he is betting that there are fewer bears in the market because the overwhelming bearish sentiment just a few months ago has now turned bullish.
“It’s really typical when there are a lot of shorts in the market, or people who were late to join the bull market, suddenly change their predictions and start chasing the gains,” Belski said. “I think there are too many bulls right now.”
Although it sounds counterintuitive, Belski is concerned that stocks will rise significantly from here, rather than fall, because that would create the ideal environment for a sharp correction in the future.
“I don’t want to see a super surge right now,” Belski said. “I think the faster the market goes up right now, the more concerned I am.”
Because many investors are optimistic about stocks, the market is more vulnerable to a sell-off if there is a macro surprise that is significantly worse than expected. "From a sentiment perspective, we are one step away from a correction," Belski said.
As for possible macro data, Belski believes that an unexpected surge in inflation, a bad jobs report or Nvidia's earnings report that misses expectations are all possibilities.
Yardeni Research的Eric Wallerstein
Wallerstein, chief market strategist at Yardeni Research, said there are two tail risks that could prevent stocks from rising and investors should pay attention to. The first is increased geopolitical tensions.
“There’s more geopolitical tension in general,” Wallerstein said.
In addition, populist movements and nationalism are growing in popularity in countries around the world, which is bad for a globalized economy, Wallerstein said. "It will lead to a world with more friction and less growth."
The second risk is similar to Belski's concern that the stock market could see a bubble similar to the one in the 1990s.
“My thought is that valuations are expanding and the market could be reaching a bubble peak because the market becomes overly optimistic, and then that sets the stage for a bear market,” Wallerstein said.
If the Fed cuts interest rates significantly, it could add fuel to the fire. "If they do cut interest rates significantly, it will be an extreme policy path, and I think the market may be getting closer and closer to the top of the bubble, and we are very worried about this," he said.
While it is not a bad thing to follow the rally during a bubble, markets tend to decline quickly and sharply after the bubble peak, which can cause investors to significantly underperform for a period of time.
Carson Group的Sonu Varghese
Varghese, global macro strategist at Carson Group, said he has been “thinking about rising risks for months.” “We remain bullish on equities and have not changed our overweight stance, but we have increased our exposure to diversified assets, such as long-term Treasuries and low-volatility stocks,” Varghese said.
Varghese’s more defensive portfolio stance is driven primarily by possible policy mistakes the Federal Reserve could make. With the Fed’s “inflation war” largely over, labor market trends are generally weakening and “policy is too tight,” he said.
Varghese explained: “The risk is that the Fed doesn’t act aggressively enough to arrest the downward trend in the labor market, and instead takes a gradual approach to rate cuts, which puts them further behind the curve. This also means they will have to do larger catch-up rate cuts later (a repeat of the Fed’s mistake in 2022, but in the opposite direction).
While he doesn’t see the U.S. at risk of a recession right now, he said the risk of a recession in the next six to 12 months would rise if the Fed fell significantly behind the curve.
“That could have a potential impact on stocks — investors could view bad economic data as bad news,” Varghese warned.
To be clear, all three strategists are sticking with stocks and remain optimistic about the market's future trajectory, but even they are concerned about what they call a "list of potential risks."
The article is forwarded from: Jinshi Data
