Financial Market

4 Reasons to Worry About the Stock Market’s Rally

The three major indexes collectively hit record levels twice last week, the first in nearly three years. Everybody wants the market’s party to keep on—but there are several factors that could kill the music.

It’s hard to describe the current market environment. The

S&P 500

has more than doubled since the lows of the pandemic. That’s despite lending rates climbing to a 23-year high, a regional banking crisis, two wars abroad, a housing market slump and widespread predictions of a recession.

The good times kept rolling on last week, as Federal Reserve Chairman Jerome Powell refused to fuss over the latest higher-than-forecast inflation readings. The

Dow Jones Industrial Average

and S&P 500 marked their best weeks this year. The

Nasdaq Composite

closed at its best week since early January.

The market has been triggered by artificial intelligence. The Magnificent Seven—Tesla, Nvidia,, Alphabet, Microsoft, Meta Platforms, Apple—make up a big chunk of the S&P 500’s market value and gained about 19%, on an average, this year. As strong as the businesses are, it has been hard for strategists to call them sustainable.

“It sort of feels like [market] momentum is moving to” a bubble,

Bank of America

Chief Investment Strategist Michael Hartnett told Bloomberg recently, referencing the seven technology stars.

Advertisement – Scroll to Continue

Wolfe’s Research Chris Senyek has called the biggest upside risk in the market a “potential formation of another late-90’s-style TMT [technology, media and telecoms market] bubble.”

Another risk lies in the Dow Theory, a tool for technical analysis. It says that a true bull market begins when one Dow average—Industrial or Transportation—breaks a previously important high and is accompanied by the other average doing the same. The rule assumes that if businesses are healthy and selling goods, transportation stocks should also profit.

That hasn’t happened. The Dow, up 4.7%, has broken previous records, while the Dow Jones Transportation average is 6% below its 2021 peak.

Advertisement – Scroll to Continue

“Enjoy this speculative and momentum-based rally, but it could well be that this still falls short of a true definition of an outright bull market,” David Rosenberg wrote on Friday.

Also consider the S&P 500’s earnings, which are expected to grow by 11% to $242.49 this year, according to FactSet. The estimate of collective profits hasn’t meaningfully changed from $241.17 in January, but the S&P 500 has gained 9.7%, breaking through the 5,200 milestone.

There’s a risk of downward revisions to these projections in the second half, which can dent the market’s momentum. Consensus estimates for profit growth jump from the mid-single digits in the first two quarters to near 20% in the third quarter, Ed Clissold, chief U.S. strategist at Ned Davis Research wrote on Thursday.

And to be realistic, the Fed can also spoil this party. The market appears to be priced to perfection, reflecting expectations of the Fed cutting rates multiple times this year and orchestrating a no landing scenario where economic growth exceeds forecast.

“If the market is a little bit taken off guard and even a soft landing at this point could be a catalyst for a little bit of a correction,” Deepak Puri,

Advertisement – Scroll to Continue

Deutsche Bank

chief investment officer in the Americas told Barron’s, referring to gross domestic product coming in slightly below forecasts.

To be sure, the market could still see further gains. It has defied odds before—cue 2023—and none of these risks could actually play out. No one knows when to fold cards in this market, but it helps to wager knowing the risks.

Write to Karishma Vanjani at

Source link

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button

Get our latest downloads and information first. Complete the form below to subscribe to our weekly newsletter.

    Input this code: captcha