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The bulls on Wall Street have been largely right about the stock market over the past two years.
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Business Insider asked three bullish equity strategists what they see as the biggest risks.
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They worry about geopolitical tensions, a market meltdown and Fed policy.
With the S&P500 Trading is less than 1% below record highs and there is plenty to be optimistic about on Wall Street.
Inflation falls back to the Federal Reserve’s long-term target, interest rate cuts seem imminent, and corporate profits, consumers and the broader economy are all proving resilient.
But there are also plenty of risks according to some economists concerned about a cooling labor market and a possible recession.
Yet, those economists have been largely wrong about what could sink the stock market and the economy.
Business Insider spoke to several people who have been right over the years so farincluding three bullish strategists, to gauge what worries them about the stock market as it sails to new all-time highs.
Here’s what they had to say.
Brian Belski of BMO
BMO Chief Investment Strategist Brian Belski’s big concern is that he’s betting against fewer people in the market, as the overwhelmingly bearish sentiment of just a few months ago has now turned bullish.
“In May/June, when you had a lot of bears or those who had been late to join the bull parade, they suddenly changed their predictions and started chasing the markets, which is beautiful, I mean beautiful, beautiful, beautiful classic ,” Belski told Business Insider.
He added: “I just think too many people are bullish again.”
While it may sound counterintuitive, Belski is concerned that the stock market will move significantly higher from here on out, not lower, as that would create an excellent environment for a sharp pullback over the longer term.
“I don’t want to see a super spike right now. I think the faster the market rises now, that would worry me,” Belski said.
And because many investors are bullish on stocks, the market is more vulnerable to a sell-off if there is a macro surprise that seriously exceeds expectations.
“From a sentiment perspective, we are one bad macro data point away from a pullback,” Belski said.
What that macro data point might be: A surprise rise in inflation, a really bad jobs report or a big miss from Nvidia all come to Belski’s mind.
Eric Wallerstein of Yardeni Research
Eric Wallerstein, chief market strategist at Yardeni Research, told Business Insider that there are two tail risks that could hold back the stock market’s advance that should be on investors’ radar.
The first is increasing geopolitical tensions.
“Let’s say the Middle East is blowing up, Russia-Ukraine, China-Taiwan, like the overall geopolitical scene is much more tense,” Wallerstein said.
Moreover, populist movements and nationalism are gaining popularity in countries around the world, which Wallerstein believes is not good for a globalized economy.
“That just leads to a world with less rigor and less growth,” Wallerstein said.
The second risk, similar to Belski’s concerns, is a stock market melt-up in the 1990s.
“The idea is that valuations rise and you take a hit because the market becomes too exuberant, and that then creates the conditions for a bear market,” Wallerstein said.
And the Fed could add fuel to the fire if it cuts rates aggressively, Wallerstein said.
“If they cut that much, which is such an extreme policy path, I think a breakdown at the top becomes increasingly likely, and that’s certainly something we’re concerned about,” Wallerstein said.
While riding a bubble on the way up isn’t a bad thing, it is the sharp and rapid downturn that often follows a bubble peak that can lead to a period of significant underperformance for investors.
Sonu Varghese of the Carson Group
Sonu Varghese, global macro strategist at Carson Group, told Business Insider that he has been “thinking about increasing risks for a few months now.”
“We still like equities and have not changed our overweight, but we have increased our exposure to diversifiers such as long-dated government bonds and low-volatility equities,” Varghese said.
Varghese’s more defensive portfolio stance is largely driven by what a Federal Reserve policy error might look like.
With the inflation battle largely over and labor market trends generally weakening, “policy is too tight,” Varghese said.
“The risk is that the Fed does not act aggressively enough to halt the downward trend in the labor market and instead takes a gradual approach to rate cuts, leaving them further behind the curve. Which also means they will have to make bigger catch-up cuts. later (a repeat) of what happened in 2022, but from the other side,” Varghese explained.
While he doesn’t see a risk of an impending recession, he said the risk of a recession will increase within the next six to 12 months if the Fed falls far behind the curve.
“That could potentially impact equities; poor economic data is likely to be seen 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 lies ahead for the market.
But even they worry about the endless list of potential risks.
Read the original article Business insider