Something strange has been in the air since the beginning of the second quarter, and many on Wall Street believe it could be a sign of an upcoming stock market crash. Despite a strong start to the year, investors and economists alike appear concerned about the possibility of a brutal correction lurking beneath the seemingly benign surface.
At first glance, the situation looks relatively bright. Despite the sharp decline in April, S&P500 It’s up about 9.5% since the beginning of the year, for an average annual return of almost 10%, but 2024 is not even halfway through yet. Corporate profits also increased by 5.2% from the previous year, the first significant increase in almost two years.
However, the overall structure of the market has changed in just over a month. The S&P fell 4.3% in April on the back of overwhelming economic data, one of the strongest months on record for stocks. Unfortunately, it may just be the beginning.
Overwhelming economic indicators cast a shadow
Inflation has apparently proven more stubborn than economists expected and continues to erode the purchasing power of ordinary Americans. As a result, the Fed is expected to keep interest rates high for a longer period of time. CME Group currently predicts one or no rate cuts this year, despite forecasting at least three cuts this year.
The labor market is finally starting to feel the pinch of the Federal Reserve’s monetary tightening, as evidenced by an unexpected spike in the unemployment rate in April and an increase in jobless claims.
Even in gross domestic product (GDP) First quarter growth was lower than expected by a wide margin.
Now, there are certainly concessions to be made regarding all the economic indicators mentioned above. Inflation has not eased, but it is not rising significantly at an annual rate of 3%. Although it falls short of the Fed’s 2% target, it is certainly far from the June 2022 peak of 9.1%.
It’s a similar story for employment and GDP. Although unemployment and economic output have slowed, there is no real fear of a recession.
But, as the old saying goes, Rome wasn’t built or fell overnight.
Will the stock market crash in 2024?
In fact, this reversal in GDP, employment, and inflation could be the beginning of a broader deterioration.
Corporate earnings are strong, but 70% of S&P 500 stocks are trading below their 2021 highs. Last month, the widely watched Fear and Greed Index hit “fear” for the first time since 2023, and has remained there ever since.
That said, some on Wall Street believe that declining economic prosperity may not actually matter all that much to stock prices. Indeed, for income-focused investors, profits are paramount even amidst growing economic turmoil.
“We don’t need the Fed to cut interest rates to keep stock prices rising; we just need solid earnings growth,” said Christy Akrian, head of investment strategy at iShares Americas. Los Angeles Times.
Ultimately, however, even profits will come under pressure due to economic contraction. After all, how much can unemployed Americans have to spend, especially as the cost of everything continues to rise every month? Relying on the continued strength of the sector is like relying on the structural integrity of a house in the sand.
This does not mean that a stock market crash is the base case, nor does it mean that a recession is certain. Rather, it is clearly a notice that the situation has changed. It remains to be seen whether this will lead to the market correction that many are warning about.
On the date of publication, Shree Dua did not have (directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer and are subject to InvestorPlace.com Publishing Guidelines..
