The stock market risks keeping Wall Street’s biggest bulls up at night

• Wall Street bulls have been right about the stock market for the past two years.

• Business Insider asked three top stock strategies what they consider the biggest risks.

• They worry about geopolitical tensions, a market meltdown scenario and Fed policy.

With the S&P 500 trading less than 1% below its record highs, there’s plenty of reason to be bullish on Wall Street.

Inflation is falling to the Federal Reserve’s long-term target, interest rate cuts appear imminent, and corporate earnings, consumers and the broader economy are all proving resilient.

But there are also plenty of risks, with some economists worried about a cooling labor market and a potential recession.

However, these economists were largely wrong about what could sink the stock market and the economy.

Business Insider spoke with several people who have been right so far over the past few years, including three bullish strategists, to gauge what worries them about the stock market as it reaches new highs.

Here’s what they had to say.

Brian Belski of BMO

For BMO chief investment strategist Brian Belski, his big concern is that he’s betting against fewer people in the market as the overwhelming bearish sentiment of a few months ago has now turned bullish.

“In May/June when you had a lot of bears or the late bulls suddenly change their forecasts and watch the markets go up, which is nice, I mean nice, nice, classic nice,” Belski said. for Business Insider.

He added: “I think too many people are optimistic again.”

Although it sounds counterintuitive, Belski is concerned that the stock market will move significantly higher, not lower, from here, as that would create a favorable environment for a sharp pullback down the road.

“I don’t want to see a super top right now. I think the faster the market goes up now, that would worry me,” Belski said.

And with many investors feeling bullish on stocks, the market is more vulnerable to a sell-off if there’s a macro surprise that misses estimates badly.

“From a sentiment perspective, we’re one bad macro data point away from a pullback,” Belski said.

As for what that macro data point might be, a surprise increase in inflation, a really bad jobs report or a big miss from Nvidia come to mind for Belski.

Eric Wallerstein of Yardeni Research

Eric Wallerstein, chief market strategist at Yardeni Research, told Business Insider that there are two tail risks that could halt the stock market’s advance that should be on investors’ radars.

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The first is rising geopolitical tensions.

“Let’s say the Middle East explodes, Russia-Ukraine, China-Taiwan, just the overall geopolitical scene is much more tense,” Wallerstein said.

In addition, populist movements and nationalism are gaining popularity in countries around the world, and that’s not great for a globalized economy, according to Wallerstein.

“This just leads to a world with fewer branches and less growth,” Wallerstein said.

The second risk is, similar to Belski’s concern, a 1990s-style meltdown in the stock market.

“The idea is that valuations expand and you kind of get hit from the top, because the market gets too crowded, and then that creates the conditions to get a bear market,” Wallerstein said.

And the Fed could add fuel to the fire if it cuts interest rates aggressively, according to Wallerstein.

“If they’re going to cut that much, which is such an extreme policy path, I think that blowout becomes more and more likely, and it’s certainly something we’re concerned about,” Wallerstein said.

While riding a bubble to the top isn’t a bad thing, it’s the sudden and rapid decline that often follows a bubble top that could lead to a period of significant outperformance for investors.

Sonu Varghese from Carson Group

Sonu Varghese, global macro strategist at the Carson Group, told Business Insider that he has been “thinking about raising risks for several months.”

“We still like equities and have not changed our overweight, but we have increased our exposure to diversifiers such as long-term Treasuries and low-volatility stocks,” Varghese said.

Varghese’s more defensive portfolio stance is primarily driven by what a Federal Reserve policy misstep might look like.

With the fight against inflation largely over and labor market trends generally weakening, “policy is too tight,” Varghese said.

“The risk is that the Fed will not act aggressively enough to stop the downward labor market trend and instead pursue a gradual approach to rate cuts that leaves them further behind the curve. Which also means they’ll have to make bigger catch-up cuts. later (a replay of what happened in 2022, but from the opposite side), Varghese explained.

While he sees no risk of an imminent recession, he said the risk of a recession will increase over the next six to 12 months if the Fed remains far behind the curve.

“This could have a potential impact on stocks – bad economic data is likely to be traded as bad news by investors,” Varghese warned.

To be clear, all three of these strategists are sticking with stocks and still have an optimistic view of what’s next for the market.

But even they worry about the endless list of potential risks.

Read the original article on Business Insider