The stock market has been shaky recently. Any of a few select factors could cause a meaningful drop.
The
at just over 4700, has been unable to reclaim its record closing high of 4796, which it first hit in early January of 2022. After rising close to it three times over the past month, sellers have come in each time to knock the index lower. It’s now down almost 1% to start the new year.
The market might need a true “catalyst,” or event, to bring it significantly lower. It dipped a bit below 4700 a few times last week, but dip-buyers came in to send to higher again. Yet the market is clearly having trouble sustaining a rally.
That’s not surprising, given that it’s already pretty expensive; the S&P 500 trades at 19 times aggregate expected earnings per share analysts expect for the coming 12 months, about the highest multiple it has touched since the Federal Reserve began lifting interest rates in early 2022 to reduce economic demand. Higher rates make equities less valuable, and the index at its currently elevated multiple isn’t seeing overwhelming buying interest.
Now, a few lurking catalysts could knock the market lower.
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Disappointing profit guidance is one risk. Strength in sales is the concern, given that demand for goods and services tends to wane with a delay to when rates rise, and the economy has maintained a strong rate of growth in recent quarters. Since growth can only weaken from here, companies are likely to issue conservative guidance, especially if they see weakening top-line trends in the final few weeks of the fourth quarter. Those quarterly reports will begin Friday with releases from
and
“The introduction of underwhelming full-year 2024 guidance likely will remain a near-term net negative catalyst,” wrote Wells Fargo’s chief U.S. equity strategist Chris Harvey.
Consistent with that, some areas of the economy have already shown some cracks, which means profit forecasts might need to drop. The Institute for Supply Management’s manufacturing purchasing manager’s index, a broad measure of manufacturing activity, has recently trended at just below 50. That’s down from around 55 just before the Fed started hiking rates. Its recent level, historically, should equate to S&P 500 EPS this year that are about 10% lower than the current aggregate forecast from analysts covering the index’s companies, according to
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The other factor that could dent stocks would be that the market doesn’t see the number of Fed rate cuts it currently expects. The federal funds futures market expects a handful of cuts throughout the course of this year, according to the CME Group. Those expectations, which began to brew last year as the rate of inflation declined, drove the S&P 500 up double digits in 2023. Any reversal in those expectations would likely drive the stock market lower, and there’s a good chance that markets scale back their rate cut expectations with inflation still a bit above the Fed’s 2% target.
This isn’t the time to buy the stock market. Wait for a drop.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
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Read More: The Stock Market Looks Vulnerable. What Can Bring it Down.
